We all want to be able to afford retirement someday. They teach us to invest in our 401Ks; maybe at age 70, we can escape the rat race.
But what if we could get away sooner? What if we could retire with a $1 million portfolio that also paid us $40,000 to $50,000 per year—without selling shares?
That’s the Magic of Dividend Growth Investing (DGI); you can build an amazing portfolio that pays you monthly.
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Think of DGI as building a rental house. The house appreciates in value along with the real estate market, and your rent also increases with the rental market. You get the best of both worlds.
What kind of investor are you? I separate dividend investing into three strategies: passive index fund investing, DGI, and income investing.
Passive index fund investing focuses on capital appreciation and only pays small dividends. Income investing focuses on high-yielding dividends but has almost no capital appreciation.
DGI gives you the best of both worlds: capital appreciation and high income. Over the years, your DGI stock portfolio will increase in value and the dividends it pays.
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It uses four techniques to increase the compounding effect: dividend growth, capital appreciation, dividend reinvestment, and dollar-cost averaging.
- Dividend Growth. By picking blue-chip dividend payers, you can take part as they raise their dividends annually. This helps your portfolio stay ahead of inflation.
- Capital Appreciation. As your business produces more profits, its value grows on the stock market.
- Dividend Reinvestment. By reinvesting your dividends, you get the full compounding effect. When it’s time to retire, you simply turn off dividend reinvestment and live on the income.
- Dollar-Cost Averaging. You can grab more shares when prices are lower by purchasing your stock weekly or monthly. Over time, dollar-cost averaging is the best way to invest consistently.
Picking your DGI stocks. Now that you are a huge fan of DGI, it’s time to pick your stocks. My article “Your First Five Dividend Stocks” is a great place to start.
I also divide DGI stocks into three categories: (high growth/low yield), (medium growth, medium yield), and (low growth, high yield).
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Depending on where you are on your retirement path, you’ll want to pick accordingly. For example, if you have 20 years to retire, you may want to choose a high-growth stock like Costco (COST).
- High Growth/Low Yield. These stocks yield 1% or lower but grow their dividend at a high rate annually: Costco (COST), Visa (V), Mastercard (MA), Apple (APPL), and Microsoft (MSFT).
- Medium Growth/Medium Yield. These stocks are the Dividend Aristocrats—solid blue-chip companies that consistently increase their dividend annually. They usually yield between 2-4%: McDonald’s (MCD), Starbucks (SBUX), Procter & Gamble (PG), Johnson & Johnson (JNJ), and Prudential (PRU).
- Low Growth/High Yield. These stocks are mature companies with slow dividend growth but pay high yields today. I use these companies in my income-investing portfolios as well. They usually pay between 6-9%. AT&T (T), Verizon (VZ), Pfizer (PFE), Altria (MO), and Phillip Morris (PM).
Why Dividend Growth Investing? So, what’s so great about dividend growth investing? Over time you are building a fantastic portfolio akin to running a business.
Your stocks will do all the work; you simply have to review them occasionally. The longer you invest, the better your yield on cost.
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For instance, say you buy stock XYZ for $100, which pays $3 per year (3% dividend yield). In ten years, it may be worth $200 and pay $6 (3%). However, you still only paid $100, so your yield on cost is 6%.
When you have a massive portfolio of 20-25 stocks, these little gains will combine into something extraordinary.
Four years as a DGI investor. I have been dividend investing for four years and love it daily. I have learned to shut out the news and keep dollar-cost averaging into my positions.
I have never sold a DGI stock, and many special dividends, mergers, stock splits, and spin-offs have occurred over these four years.
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Every time a company raises its dividend, it’s free money into your pocket (or account). Costco (COST) and Public Storage (PSA) paid massive special dividends.
Apple (APPL) conducted a stock split, and AT&T (T) did a spin-off of their Warner Bros brand (WBD). These events keep DGI investing interesting every day.
How to invest in DGI stocks. I use STASH (affiliate) as my main DGI investing portfolio. It gives me options to invest in individual stocks weekly and monthly and make instant purchases.
When the stock market is down, it’s a great time to pick up shares on sale. Stocks like AT&T (T), Verizon (VZ), and Altria (MO) get beaten down constantly.
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You must remove the emotion from investing by focusing on your income. I document every penny of dividends I receive.
When you look year-over-year, you can see some amazing growth. Looking at my STASH portfolio, I can see my totals: April 2021 ($26), April 2022 ($71), and April 2023 ($110).
DGI until retirement. The best part of DGI is that you don’t have to sell shares to capture income. That’s why I am not a massive fan of 401Ks; you must sell shares to generate revenue.
Imagine having a DGI portfolio that creates a $60,000 to $80,000 yearly dividend income. It’s quite possible over a 20-year DGI investing career.
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With this income, you can move overseas or to a small city and live a great life. All it takes is patience and consistent dollar-cost averaging.
Conclusion. Is dividend growth investing right for you? I think so. Many people warn you off from investing in individual companies.
However, these same people will refer you to passive index fund investing. Yes, index investing is simpler initially, but not when it comes time to sell shares.
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Why not have great companies like McDonald’s (MCD) pay for your retirement? These blue-chip companies understand how significant dividends are to their investors.
They only cut their dividends with a major consideration. I have suffered a few dividend cuts but far more dividend raises.
By choosing 20-25 companies, you can ensure that most go the distance. And if you follow the news, you can catch new DGI companies like Ally Bank (ALLY) and Carries (CARR).
I love dividend growth investing and will sing its praises forever. Yes, I am a hardcore income investor, but I still put the dollar-cost average into my DGI portfolio every month. 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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