I started managing my own investments in February of 2011 after retirement at the end of 2008. I discuss the experience of my first year as an individual investor in my first article for Seeking Alpha. I said, "I am less fearful about my investing future because every day I learn more about what is means to be a Dividend Growth Investor."
How true that statement turned out to be. One month ago I didn't understand how growth plays out in the world of the Dividend Growth investor. I was still thinking of growth on capitol rather than focusing on growth in the dividend paid and subsequently growth in income stream.
I'm retired, and starting to pay the bills from an income stream received every month from the dividends generated from my portfolio. I don't have the luxury of so many Dividend Growth investors of re-investing my dividends. Almost all my investments when I retired were from employer-based 401Ks. My wife's offered mutual funds, while mine provided index funds. Big baskets of stocks are offered in each, including large numbers of financials and many stocks paying small dividends or no dividends at all. I'm interested in a portfolio of dividend stocks with stable growth and growing dividends. But I'm getting ahead of myself.
Most of you, if you're retired, have used one or more of the calculators designed to assist those just entering retirement. Most of the ones I'm familiar with suggest you withdraw 4% from the principle of your portfolio each year along with an amount equal to inflation. Again, most suggest that this approach, based on the Monte Carlo effect, a reassuring title for those like me that hate to gamble, will create a stream of income that will last from 25 to 30 years with large reductions in principle as you get to year 25. Such an approach is based on an average growth in stock capital gains.
I have discovered that dividend growth is a better way to invest in retirement. I believe that by investing in stocks with a solid history of both paying and growing dividends in good times and bad, I can maintain a portfolio that is sustainable and provides an income stream that grows at the rate of inflation. If I'm right I don't have to worry about whether the market goes up or down just whether each of my holdings maintains a reasonable payout ratio, based on its peers and has a growing, sustainable dividend.
I think that's where history can serve us well. Every retiree investor who has not done so already needs to immediately download from the website of SA Contributor David Fish the Excel spreadsheets for the Dividend Champions, Contenders and Challengers. You now have a list of every US Stock with a history of sustained dividend and dividend growth some going back more than 50 years. At last count there were 451 stocks with at least five years of sustained dividend growth. From there customize to meet your needs.
Don't trust US banks - just remove them from your spreadsheet. Most of you will probably pass on stocks with yields under 1.5 or 2%. On mine, I removed most of those without a 5 year Dividend Growth Rate (DGR) less than inflation. Payout Ratios, P/E's and Betas may also be considerations for what stays on your list. Mine now contains 179 stocks, but I'll likely reduce that number as I subject them to further review.
In my second article I described my quest to determine the best dividend stocks of the past ten years (2002-2011). I'll be revealing the findings of my research and my current personal investment portfolio of dividend stocks in a series of upcoming articles.
For now I'm most comfortable with an equal weight portfolio with each stock representing between 2 and 3% of the total portfolio. I feel a large portfolio of quality Dividend Champions, Challengers and Contenders helps to safeguard against the effects on my overall portfolio of a stock having both a large capitol loss and a loss of dividend in the same year. It's a larger number of stocks than some are comfortable holding but for right now it seems to work for me. My goal is to keep my dividend yield at between 4 and 5%.
There have been many who have helped so much on my personal journey of discovery: The three Davids (Fish, VanKnapp, and Crosetti), Jeff Paul, Todd Johnson, Robert Schwartz, Norman Tweed, Chowder, Richjoy, Brad Thomas, Regarded Solution, Gapwedge, Global View, Tim McAleenan, and so many more.
I hope in the weeks, months and years ahead to in some small way aid and ultimately learn from those who, like me, are new to individual investing, already in retirement and drawing income from their portfolios. We are a unique and growing group. We need people like the above to guide us and a forum like this to learn from each other and grow. Please join me.