A pessimist might say life is a series of bad things happening, then we die. I certainly wouldn't go that far, but life often deals us unfortunate circumstances to work through at what seems to be the most inopportune time. During the 2007-2008 economic downturn, many people lost their jobs at a time when companies weren't hiring. When things like this happen, those with an alternative income, including dividend growth stocks, are in a better position to deal with the circumstances thrust on them.
Here are some things you can do today to prepare for your financial rainy day:
Have A Plan
If you suddenly found yourself unemployed and were unable to immediately replace the lost income, do you know what you would do? I suspect there are few families that have given a lot of thought to this. It is like buying a cemetery plot - it is not high on the list of desirable things to consider. The drive home after receiving a pink slip is too late to start planning; at this point, you should be in a position to start executing your plan.
Prepare to Execute Your Plan
Schools and businesses have fire drills for a reason. We all know that we need to get out of a burning building, but do we really know how until we practice. Some time back, my employer had a fire drill and too many people were going down the stairs on one side of the building creating a traffic jam. If it had been a real fire many could have lost their lives.
In the same regard, it would make sense to take your plan and play "what if I lost my job today." You need to understand the answers to these questions: How long can I go without finding a replacement job? Will my plan permanently damage my financial position? What adverse effect will this have on my family (kids' college, braces, house payments, etc.)? What is the worst case scenario? How will we fare in the worst case scenario?
Develop Alternative Income Streams
One of the best ways to ensure financial success is to develop alternative income streams. If one stream dries up, you have others to fall back on. We all have things we are good at, most can be packaged in a way to provide alternative income. Again, this is not something we can quickly develop on the day we are terminated.
Dividend Growth Stocks
One of the best alternative income sources are dividend growth stocks. Just like a regular job they can provide you a reliable and growing income. With advance planning, your income portfolio can become the foundation of your contingency plan.
Consider a stock such as The Coca-Cola Company (NYSE:KO) that is found in virtually every dividend growth stock portfolio. KO has paid a cash dividend to shareholders every year since 1893 and has increased its dividend payments for 52 consecutive years. Since 2004, the company has averaged 9.8% annual dividend growth.
Some might say that no one drinks soda anymore. KO is much more than just sodas. The company is constantly reinventing itself, from the 1960 acquisition of Minute Maid to its 1999 launch of Dasani bottled water. KO has also found ways to make money on non-beverage operations, such as its 1982 purchase of Columbia Pictures for $692 million, which it later sold to Sony for $3 billion in 1989.
Companies such as KO always find a way to succeed, even when it appears the odds are stacked against them. Here are several other dividend stalwarts to consider when building your income portfolio:
Colgate-Palmolive Company (NYSE:CL) is a major consumer products company that markets oral, personal and household care and pet nutrition products in more than 200 countries and territories. The company has paid a cash dividend to shareholders every year since 1895 and has increased its dividend payments for 51 consecutive years. Current yield: 2.3%.
McDonald's Corporation (NYSE:MCD) is the largest fast-food restaurant company in the world, with about 35,000 restaurants in 119 countries. The company has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 37 consecutive years. Current yield: 3.4%.
The Procter & Gamble Company (NYSE:PG) is a leading consumer products company that markets household and personal care products in more than 180 countries. The company has paid a cash dividend to shareholders every year since 1891 and has increased its dividend payments for 56 consecutive years. Current yield: 3.2%.
Johnson & Johnson (NYSE:JNJ) is a leader in the pharmaceutical, medical device and consumer products industries. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 52 consecutive years. Current yield: 2.8%.
AT&T Inc. (NYSE:T), formerly SBC Communications, provides telephone and broadband service and holds full ownership of AT&T Mobility (formerly Cingular Wireless). The company has paid a cash dividend to shareholders every year since 1984 and has increased its dividend payments for 31 consecutive years. Current yield: 5.2%.
The Bottom Line
Even if you never lose your job, one day you will retire and will face a very similar situation. Your salary will go away, replaced by much smaller Social Security payment, and possibly a pension payment (for a shrinking group of employees). More and more retirees have to manage their nest egg to ensure you don't run out of money. A good plan, the ability to execute and multiple revenue streams including blue-chip dividend growth stocks will make the transition much easier.
Full Disclosure: Long KO, CL, MCD, PG, JNJ, T in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.
Disclosure: The author is long KO, CL, MCD, PG, JNJ, T.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.