Today, we will dive deeper into the world of wealth-building. Sadly, most middle-class folks will never buy individual stocks.
The purpose of dividend growth investing is to build a nest egg that also pays you. In addition to a steady paycheck, your dividend payments grow over time to combat inflation.
Does this method sound too good to be true? It’s actually quite simple, but it takes time to build your portfolio. And most people are impatient.
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Welcome back to the Middle-Class Investing 101 series (101, 102, 103, 104, 105, 106, 107), where we grow wealth from the bottom up.
What is dividend growth investing? Dividend growth investing (DGI) is the habit of buying blue-chip dividend-paying stocks over a long period.
The magic of DGI is that the value of your stocks increase, as well as your dividend payments. If you reinvest the dividends, you will compound your results significantly.
Suppose you bought one share of McDonald’s (MCD) in 1980. The price for the stock was $2.50, and the quarterly dividend payment was $0.008 (not even a penny).
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Today, one share of Mcdonald’s is worth $266, and the quarterly dividend payment is $1.52. By the way, McDonald’s has done six stock splits since 1983, so you would own many more shares than one.
The idea of DGI is to invest in top companies that will continue to raise dividends and increase their share price through solid business performance.
Why don’t most people practice DGI? Dividend growth investing is boring—incredibly boring. Nobody cares if your Johnson and Johnson (JNJ) stock increased its dividend by 5%.
Most investors aim for capital gains over dividends. They want their stocks to 2X, 3X, or 6X in a year or two. That’s why cryptocurrencies were all the rage in 2020 and 2021.
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With DGI, you choose 10-20 strong companies and dollar-cost average into them weekly and monthly. And that’s it!
The process requires nothing more from you. I like to monitor news about my stocks to find discounts based on bad news stories. Other than that, I consistently buy stocks for 30-50 years.
What is a nest egg? Most 401K investors aim for a large number in their portfolio. Let’s say they aim for $1 million.
Having $1 million in your 401K does nothing for paying your bills because 401Ks don’t pay you dividends. Your 401K is not enough.
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You would need to sell shares to convert your 401K into income. That’s where things get hairy because you are at the whim of the market.
Things would be much different if you had $1 million in a DGI portfolio. Your stocks would pay you every month.
You would earn between 4-6% in dividends, or $40,000 to $60,000. In fact, your dividend total would be much higher because of compounding over time.
Instead of selling shares, you could continually reinvest 25% of our dividends to grow your portfolio. Even better, you can leave your portfolio to your children with a significant tax advantage (step-up basis).
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How to construct your DGI portfolio. The best part of dividend growth investing is you can have it your way.
There are tons of dividend-paying stocks. For DGI, most people choose stocks that have a history of paying an increasing dividend payout.
You can start with Dividend Aristocrats and Dividend Kings. Ensure you have your own criteria for buying stocks, such as different business segments or sizes.
I like to buy older and newer companies. Older companies like Johnsons & Johnson (JNJ) and Procter & Gamble (PG) give me the security I want.
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Newer companies like Ally Bank (ALLY) and Carrier (CARR) will hopefully conduct many stock splits in the future. I want to take part in the growth portion of their timeline.
The benefits of DGI. What are the benefits of dividend growth investing? Staying invested in these companies will slowly shower you with good fortune.
Yes, there is bad news from time to time, but you’d be surprised how these companies overcome adversity.
McDonald’s had a banner year in 2022 and reached an all-time high in the middle of a bear market. McDonald’s has always been my favorite individual stock because I used to work there from 1997-1999.
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Over the years, companies will increase their dividends, buy other companies, conduct stock splits, and pay special dividends.
These special moments will make your day. It feels good to wake up to a dividend increase or special dividend.
The more time you spend in the markets, the more good things will happen. DGI is the ultimate form of buy-and-hold technique.
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Getting started with dividend growth investing. It’s never been easier to jump into DGI. Apps like STASH (affiliate) are perfect for setting up recurring, automatic investments.
My article “Your First Five Dividend Stocks” walks you through choosing your first few DGI stocks. These stocks pay quarterly, so you want to ensure you have different stocks to cover all the months.
If you can form a solid habit of investing $100 to $200 a week into DGI stocks, you will be well on your way to building great wealth.
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Conclusion. I started my career as a DGI investor. Although I now find income investing more satisfying, I still grow my DGI portfolio monthly.
Participating in the Apple (APPL) stock split, the Public Storage (PSA) special dividends, and Mcdonalds’ 10% dividend increase was incredible.
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DGI is dull during the accumulation phase of your portfolio; however, once you start drawing your dividends in cash, it will be the best thing ever.
Imagine getting a pay raise for doing absolutely nothing. That’s the power of dividend growth investing. With the new apps and no-cost transactions, you can build a portfolio with zero stress.
Dividend growth investing changed my life, and it can change yours. It may be a small leap of faith, but it’s worth the initial culture shock. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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