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Dividend Growth Investing - Getting Your Mind Right

Over the years I have experimented with many various investment strategies. Some worked out better than others. In the beginning I used to buy companies that held the most "Buy" recommendations by analysts. You can guess how that played out.

The next step was to monitor the top performing mutual funds and then buy the companies that were most common in each fund.

I tried the penny stocks and the pink sheets. I tried buying low dollar companies, companies whose share price was between $5 and $10, thinking they would show the most gain because after all, a dollar move on a $5 stock represents a 20% return.

That was probably my most stupid idea! A $5 stock isn't going to show a 20% return any easier than a $100 stock. A 20% return is a 20% return. It's just as easy for a $100 stock to grow $20 as it is a $5 stock to grow $1. It's all relative. It's surprising how many people can't relate to that. I know I didn't at the time.

It was then time to graduate to CNBC, Cramer and Fast Money. ... Ha! Ha!

At that point, I was gaining knowledge and experience. It was time to do something sophisticated and my mind was right for the challenge. I started to learn about CANSLIM and Investors Business Daily.

I had more success with this system than any system I had used before, but I was still undisciplined and didn't have the skills for negotiating around market pull backs. I would see excellent gains disappear on me. I lacked selling skills.

CANSLIM led me to technical analysis and I went forward ... full steam ahead. I can read a chart. I have a fairly good knowledge of technical analysis. I enjoyed several years of success swing trading on nothing more than technical analysis. I didn't even know what some of the companies I owned did. It didn't matter. I could identify high probability buy and sell points and that's what I did. Then came the Great Recession.

I decided I would invert my chart patterns and short companies. Lord knows, they were ripe for shorting in 2008. I kept placing short orders and kept getting the response, "no shares available."

You can't short if you can't borrow the shares and I wasn't a big enough player to be allowed to do naked shorts. I was now in a position where I couldn't earn a living in a market I knew I could make money at, if only I could short positions. I wasn't going to play hero and try to find a gem to go long on, in a down trending market, not for the short term anyway, and that's what swing trading is all about.

I owned a couple of dividend paying companies that I didn't pay much attention to. I had opened up a few DRIP's a number of years ago, sold most of them off to play the tech boom of 2000, and then forget about DRIP's.

It was in 2008 when I saw what D had been doing for years. I owned a DRIP in D. My sister had a DRIP in D and had it longer than me. It had outperformed everything up to that time.

The light bulb went on. I saw blue chip companies offering historically high yields. Bingo! I'm in.

It was at this time I was introduced to The Single Best Investment by a guy on Silicon Investor named Steve Felix. ... I now hit the lottery. Lowell Miller, the author of SBI taught me about dividend growth investing.

The concepts and principles that I apply today to my investing, and share with others here, are a direct result of Lowell Miller's book. I highly recommend it.

The thing I like most about dividend growth investing is that it is simple, it makes sense, it's easy to implement and it provides a high probability of succeeding over the long term.

Dividend growth investing isn't about chasing a dream, it's about building the dream, one dividend check at a time. Dividend growth investing is about understanding that the key to wealth is investing a small amount of money, on a regular basis, over a long period of time.

The longer you wait of course, the more money and/or risk you must take on. However, if dividend growth investing is to be implemented properly, it's about achieving long term financial goals with low risk and steady growth. ... Let me repeat that! ... LOW RISK and steady growth.

Dividend growth investing is common sense investing. It is about being a partial owner of a real business, not a stock symbol on a computer screen. Common sense also means spreading out your risks, but not so much that you lose control of your portfolio. Some people can manage more positions than others. Find your comfort zone.

When you become a dividend growth investor, you are no longer "playing the market." You don't have to guess or predict which sectors will perform the best going forward. Dividend growth investing is simply about buying ownership in an ongoing successful business, and if done correctly, you don't have to worry about market conditions.

How do you employ dividend growth investing properly?

I believe it starts with attitude, a certain mind set.

In the world of sports, there are many successful ballplayers who can't coach. They don't have the right mind set. There are many coaches who weren't great ball players. They lacked ball playing skills, but they have the right mind set to coach others.

Dividend growth investing takes a different mind set from what most of us are used to using. It starts with developing a plan you can stick with regardless of market activity. ... You did hear that, didn't you? ... A plan you can stick with! ... Your plan needs to allow you to stay firm in the face of adversity. It's okay to be nervous. It's not okay to panic.

I have found that if I stick with companies that have the highest financial ratings, I'm able to withstand those 30% to 50% pullbacks when the market melts down. If the "A" rated companies are going down the tubes, so is everyone else. That's how I look at it.

Once the market pulls back, at a certain point the "flight to quality" begins and that's why I own quality and stay invested in quality. "Flight" moves are powerful and fast. If you aren't in, the odds are saying, you'll miss it.

When I look for high quality companies, based on financial ratings, I add additional safety insurance by owning companies that sell a product or service we must or will buy, regardless of economic conditions. These are called your necessity companies.

How much of your portfolio should you assign to necessity companies?

Lowell Miller says if you are properly diversified among 30-50 companies, then 50% of your holdings, if not more, should be devoted to necessity companies. He says if you only own 5 companies, they should all be utilities and REIT's.

What is common sense investing?

Common sense investing is about ownership, it's about being a partial owner in an ongoing, successful business. Sometimes there's a premium to pay for that quality.

Common sense investing means that your strategy needs to be effective in all market conditions. Momentum investing works when the market is trending higher. Dividend growth investing works regardless of market conditions. Common sense investing requires owning companies who grow their dividends even in adverse times.

Common sense investing isn't about hitting home runs, it's about accepting reasonable yields, reasonable dividend growth and a resonable share price. Common sense investing is about using the power of compounding to help your income stream grow.

In closing, let me say that from my perspective, dividend growth investing isn't about worrying how you perform against the Market. Dividend growth investing is about building an income stream to meet expenses, support a life style and replace the income from your working years.

Dividend growth investing is about building an income stream that is reliable, predictable and increasing.

At some point in our investing careers, most of us are going to need to start drawing cash for expenses and other living conditions. Dividend growth investing allows you the opportunity to meet those distribution demands without selling off your assets.

Since we're all going to need to draw that income eventually, why not do it right and do it from the start? Let's not put it off until we're near retirement and go through another learning curve. Let's do it now.