Dividend Growth Investing

I am hooked on dividend growth investing.  For those of you who are not familiar with this strategy, dividend growth investing is pretty simple; when they are value priced, purchase shares in companies that have a long history of paying increasing dividends.

You’ll need to do three things to be really successful at this strategy.

3 Tips To Get The Most Out Of Dividend Growth Investing

1.  Purchase shares at really attractive valuations – meaning you buy stocks when they’re on sale, like after a bear market (March 2009 being a prime example).  There are a few ways to evaluate when a stock is a “good buy”.

You can use a low P/E Ratio, the Graham Approach, a Value Ratio, or simply look at High Dividend Yield, to name a few.  Check out Stingy Investor for the most up-to-date listing of these methods.

2. Have the discipline to wait for share valuations to become attractive before you purchase them – this means that you could potentially hold your cash for years waiting for the right opportunity.

3.  Have the patience to allow your dividend income to grow over time – you are not going to start off making $50,000/year in dividend income, but over time with a dividend growth investing strategy your growing dividends will compound and you could be earning that kind of investment income in retirement.

Tom Connolly, of the Connolly Report is the guru on dividend growth investing.  The matter-of-fact way of describing his methods are priceless, and the entire website is just a gem to read.  Here’s a quote from Tom on the dividend growth strategy:

When they are value priced, I buy common shares of companies with a good record of dividend growth and hold them for the rising income.  In 2008 our dividend income rose in spite of the turmoil by 9.9%. Did your income rise by 10% last year. Our income will be up again in 2010 too.

Our retirement plan is working. It’s not the value of the capital that’s so important, it’s the income it generates…tax advantaged income…secure income.  Dividend reductions from good dividend growers are rare events.

Also, check out Lowell Miller’s The Single Best Investment, and Stephen Jarislowsky’s The Investment Zoo.  Both of these books highlight dividend growth stocks as a great way to build your investment portfolio and give you growing dividend income in retirement.

The dividend investor website is terrific for researching a company’s dividend paying history, and it looks like they have recently updated their data history.  They were only showing dividend growth investing history as far back as 2000, but now it looks like it goes back to at least 1990.

The stock market can be wildly unpredictable, but dividend growth investing can be remarkably stable.  Fortis (FTS) has increased its dividend for 37 consecutive years.  If you bought FTS in 2005, you would now be earning 18% yield on cost from those shares.

Is it any wonder why I want to replace my employment income with dividend income in retirement?


8 Responses to Dividend Growth Investing

  1. I have recently become even more addicted to dividend investing after I calculated how much I am actually getting in dividend income per year.

    I have trouble trying not to sell my equities when the goin’s good, but I have recently been telling myself “STOP! they pay out dividends! Don’t touch!”.

    • @youngandthrifty
      It’s hard to keep your emotions in check when your stock goes up (or down) 30% or more. I guess you have to think, “What would I buy after I sold this?” Don’t change your strategy and start chasing the latest “it” stock.

      I’m looking forward to the banks raising their dividends soon, and maybe more telecos too. In 8-10 years, my yield on cost for some of these stocks will be in the double digits.

  2. Y&T, if you’re buying quality companies, don’t even look at the share price often. Just continue focusing on the payout amount.

    In terms of yield on original cost, I usually stay away from looking at that as well, since there is the “opportunity cost” of the current value of the shares.

    Sometimes, I look at dividends as as “free lunch” or cellular phone regularly paid for (with no work effort)…hopefully one day it will grow to an amount that is much more than just a few small bills!

  3. Among a lot of stock traders, 1 mistake commonly made is that investors may perhaps often exhaust themselves on merely thinking about purchasing stocks with out foreseeing that there may well come a time that they could need to let go of such stocks for lucrative reasons. Sometimes, you may realize that selling can really be extra practical than holding on to some thing that may possibly cost you a lot more within the long run. Let us learn why and when you ought to sell stocks.

  4. I am a big fan of dividend growth investing as well. However I try to identify blue chip companies with solid fundamentals first, which could afford to grow earnings. Companies which can grow earnings over time can surely afford to grow dividends as well. After that it is all about diversification, dollar cost averaging and selective dividend reinvestment.

    Good luck in your journey!

    • @DGI
      Thanks for stopping by! Finding the solid blue-chip companies is definitely the key. When I first started investing I leaned towards selecting the higher yield, but now I look at some of those companies and see that they might have trouble growing earnings and dividends in the future.

  5. I understand dividend growth stocks. Howver, if I hold the stock on record date and sell it on next day, will I be still entitled for dividend?Bonus?

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