Do you have a magnificent portfolio of highly diversified dividend growth stocks? Or, are you new to investing and are looking at investing in dividend growth stocks for the first time? Well, you’ve come to right place. There are many reasons why investors choose to invest in dividend growth investing (DGI). And, in fact, there are many reasons to invest in such a strategy. So much so that it’s hard to narrow the list to only 5. In any case, here are my top 5 reasons to invest in dividend growth stocks.
1. It’s Easy
There are so many complicated strategies out there to invest. The first thing a beginner investor has to decide is which asset class they should invest in. These include real estate, forex, options, stocks, futures, commodities, peer-to-peer lending, possibly cryptocurrencies, etc. Moreover, in each asset class, there are different ways or strategies with which to invest. Let’s take options as an example. The strategies range from simply buying calls and puts to the more complicated covered call strategy or even more complex strategy known as the modified butterfly spread. It’s definitely a lot to take in at first.
With dividend growth investing, you are investing in stocks. True, there are a myriad of ways to invest in stocks, but investing in dividend growth stocks is one of easiest. It’s as easy as riding a bike. You simply find companies you’re interested in that have a long history of raising dividends. You still have to do your research to ensure that the fundamentals of the companies are strong and that the company will continue to pay dividends, but that’s not too hard. A great place to start are companies that appear on the Dividend Aristocrats list. As the article explains, to qualify, “a company must typically have raised dividends for at least 25 [consecutive] years” or more as of the current date. As of November 1, 2017, the updated Dividends Aristocrats list can be found at Sure Dividends’ post entitled, The 2017 Dividends Aristocrats List: 25+ Years of Rising Dividends.
2. It’s Passive
Who doesn’t like the idea of passive income? There are different ways to generate passive income. Arguably, buying and holding rental properties is a way to experience passive income. For example, I currently own a home that I rent out. Now, I logged onto my bank account and noticed that the rental income I earned for the month (minus property management fees) were deposited into my checking account. Did you catch that? I have a property manager. So, even though I live thousands of miles from my house, my property management company is there managing my property. I don’t have to take tenant’s phone calls or deal with any of their issues directly. The property management company does all of that. All I do is just wait until the middle of the month to look at my statement and see how much rental income I earned that month.
However, to get to the point of earning rental property income, the initial setup was very difficult. It took weeks (if not months) to find the right property, going back and forth with my real estate agent. Of course, I had to ensure that I had the right financing. Even once the house was purchased, it took time because I had to live in the property. Although, I should emphasize that even while living in the property, I earned rental income because I had roommates that pretty much covered the mortgage. But, my point is, it took a long time, and arguable a lot of money (not not nearly as much for me because I was a first time home buyer) to get to earning passive income from real estate.
With dividend growth stocks, I don’t need to qualify for financing at a bank. I don’t need to have great credit. I simply can start investing with as little as $10 a month. Now, I definitely recommend much more than $10 a month, as you want to pay attention to fees, etc, but even if that’s what you can afford, you can definitely start somewhere. You don’t need to have $3000 saved up or anything like that before you can start to invest.
Consider Direct Reinvestment Plans (DRIPs) and such transfer agents who offer DRIPs like Computershare and Wells Fargo Shareowner Services. Don’t invest with more money that you can afford to lose. But, if you choose to invest in dividend growth stocks, understand that it’s a truly passive form of investing. The only work to be done is picking the stocks you’re interested in and then begin the process to fund your account with whatever amount you’re comfortable with. That’s it. Like most people, I go to work at least five days out of the week. Yet, I know that each day, my money is working hard for me when I’m at work. After I get home and I want to sleep, my money is still working hard for me while I sleep. That’s the power of passive income.
3. It’s Automatic
David Bach is the famous author of the book, The Automatic Millionaire (referral link), which appears on my list of Resources. One of the important points that he makes in his book is that you should make your savings and investing automatic. Doing so is more efficient and helps take the emotions out of investing. I completely agree.
Well, you can do the same with DGI. The way I have my portfolio set up is that every month, I automatically contribute the same amount of money to my portfolio. That gives me the benefit of dollar cost averaging. In other words, I get the average price of the stocks overtime, and I don’t have to worry about when I should buy or sell. However, even if you choose to manually contribute to your own portfolio, there’s another automatic aspect of following the DGI strategy you can’t ignore. That is, companies automatically pay you dividends on a monthly, quarterly, or annual basis.
You heard that right! Let’s take Realty Income (NYSE: O) for example. Realty Income is probably one of my favorite stocks in my dividend portfolio right now because it pays monthly dividends. Other companies like Coca Cola and Johnson and Johnson pay quarterly dividends. You even have companies that pay annual dividends. I am by no means suggesting that you should just jump right in and start investing into any one company. It’s important to do your research and consider such important things as taxes, fees, etc. For example, you’ll find that Realty Income is a Real Estate Investment Trust or REIT and is tax inefficient when held in a taxable account outside of your retirement account.
Even though the dividend payments are automatic, you still can’t turn a blind eye to the fundamentals of the company. What difference does it make if a company pays you dividends, but because of mismanagement, or scandal, or competition or whatever, the company’s dividend payout is unsustainable and/or the company tanks? But still, it’s hard to argue with the fact that every month, or every quarter, your dividend company will automatically reward you over and over again simply for the one-time price of purchasing the company’s shares.
4. It’s Exponential
Honestly, with all the great reasons listed so far, it’s hard to imagine I would find any reason better. But, this one probably takes the cake. By investing in dividend growth stocks, you get the benefit of exponential growth!!!
Albert Einstein famously said that “compound interest is the eight wonder of the world. He who understands it, earns it… he who doesn’t…pays it.” Who am I to disagree with Albert Einstein?
When I was in community college, I remembered my economics instructor taught us about compound interest and the principle of compounding. I remembered thinking that I finally knew the secret to getting rich. The problem? I had absolutely no idea how to earn compound interest!!! Well, dividend growth investing is a way to earn compounding or exponential growth.
Let’s look at a real life example. As indicated in my October 2017 Dividend Income Report, I earned $9.68 in dividend income from Coca Cola last month, based on the number of shares I owned and the dividend per share the company payed out. Now, that’s $9.68 that I earned simply for owning shares in Coca Cola. That amount of money went back into my portfolio by purchasing 0.2151 shares of Coca Stock at the price of Coca Cola on October 2, 2017. In other words, I have 0.2151 more shares than I did before. This gets added to the number of shares I already owned. So, when I get paid dividends from Coca Cola again, I will get paid not just on the original shares I own, but on all the new shares I was able to accomplish through dividend investing. I hope that makes sense.
Let’s take another easy example, just to drive the point home. Let’s say I have $100 in the bank and I earn 10% interest. Now, I will have $110 in the bank. If I earn another 10% compound interest next year, that means I would be earning 10% of $110. That would give me $111. That’s different if I was earning simple interest on my original amount. In that case, every year I would only be increasing my total by $10. I would not experience the exponential growth I would get from compound interest.
So, a key reason to invest in dividend growth stocks is the benefit of receiving compounding or exponential growth.
5. It’s Safe
As I mentioned before, it’s really hard to identify the top 5 reasons for investing in dividend growth stocks. But, my final top 5 reason for investing in dividend growth stocks is because it’s safe. Now, let’s be clear. Investing in a single stock is inherently risky no matter how big the company is. Remember Enron or WorldCom? You never want all your eggs in one basket.
However, I believe that there is a safe way to invest in dividend growth stocks. Instead of having all your eggs in one basket, consider a diversified portfolio of stocks from across several industries. Moreover, you should also be concerned with the weight of any one company in your portfolio. So, let’s say you have a portfolio of 50 stocks, but 70% of your money is investing in one stock. That’s not a good thing if that stock falls by a lot. But, if only 3% of your funds were invested in that company, the impact on your overall portfolio would be lessened. In my opinion, a highly diversified portfolio of individual stocks is a great way to invest in dividend growth investing.
There are many reasons to invest in dividend growth stocks and it’s very hard to limit it to just 5. In fact, one of the reasons I really wanted to add is that investing in dividend growth stocks is fun. Sure, an investor could invest in index funds, which is instantly diversified. But, it’s really fun to invest in individual companies because I can identify with the companies I’m invested in. So, for example, one of the companies I’m invested in is Starbucks. I love Starbucks. So much so that I go there on roughly a daily basis. It’s fun to know I’m supporting a company that I am invested in. That level of fun, for me, is diminished with investing in index funds, which I do via my retirement accounts.
Finally, I am still learning about investing myself. You shouldn’t rely solely on anything in this post (or on this blog) as a basis for your investment decisions. I encourage you to do your own research before you invest and/or talk to a certified financial adviser. There are also risks with any strategy, including DGI, which this post admittedly did not cover. However, in my opinion, investing in dividend growth stocks is a great strategy to pursue as part of your overall investment plans. That’s because it’s easy, it’s passive, it’s automatic, it’s exponential, and it’s safe!
What do you think? Do you agree with my list? Do you have your own top 5 reasons for investing in dividend growth stocks? Let me know by commenting below.