Right now we have two choices on how to invest in stocks, we can either passively invest in index funds via the Captial Appreciation Method (101) or we can actively invest in dividend-paying stocks via Dividend Growth Investing (102). They both have their pros and cons. You can reach your financial independence goals faster through CAM, however, you will be selling shares to create income for yourself during retirement. For DGI, it will take you longer to achieve your financial independence goals, but you will not be selling any of the underlying securities to earn income- you can live off the dividends. However, DGI is a very active way of investing. What if I came up with a crazy idea and combined both the methods? You may be laughing to yourself and saying, “Duh, many people are already doing that. It just makes sense.” However, once you get into the world of investing, you will discover that most people do not cross both of the methods.
I have discovered that there are 4 distinct investment philosophies at play. 1) The 401k/TSP investor allocates money directly from their paycheck. They only want to know that their money is growing. 2) The ROTH IRA/Brokerage Investor uses the CAM to invest in index funds. They have little knowledge of the overall stock market. 3) The Growth Investor uses the CAM method but invest in high-flying individual stocks such as Tesla and Zoom. They are trying to be rich as soon as possible. 4) Finally the DGI team invests in dividend growth investing. They are usually older, wiser but also extremely particular. They frown on anyone who invests in ETFs. They do everything themselves.
Combining CAM and DGI has been the best thing for me. I DO NOT plan to live off of my dividends or sell my stocks. My military retirement should be enough for my wife and me to live comfortably. I still want to amass a HUGE stock market fortune for my kid’s sake. Index funds will continue to go up, forever. They will have ups and downs, but the stock market goes up and up. Investing in index funds is a great way to become rich, slowly. However, if I leave my kids a ton of index funds, they will not be receiving enough income from these stocks to survive. That is where DGI comes into play. Investing in great dividend stocks can literally be enough for a family to survive off for generations. See the snippet below. However, we cannot guess what stock will be the next Apple, so we just keep diligently investing. In the meantime, our index funds are doing a lot of heavy lifting as well. They are ensuring that our portfolio is growing with inflation. It leads to a very SEXY portfolio, excuse my French.
Before I continue, I want to give a little back story on how I created my CAM/DGI method. I started reading about Dividend Growth Investing as a way to build passive income. Remember, DGI is not passive, but I learned this later. I read a few articles and I invested in some blue-chip stocks like McDonald’s. I also started looking at dividend yield as a way to gauge value. Wrong. Everything was going rather smoothly until the pandemic happened. My stocks were decimated with no recovery on site. At the same time, I had starting dollar-cost averaging into my STASH portfolio, mostly in VTI (total stock market). During the pandemic, I was buying tons of index funds for cheap valuations. I opened both my kids’ brokerage accounts with $90 into VTI on March 23, 2020, which is the day that the stock market his rock-bottom during the pandemic. I bought VTI for $118.02 (Dec 13, 2020) and today it is worth $190.17. I went from feeling like a complete idiot to feeling okay. Even with all the doom and gloom in the stock market during March 2020, I knew that the stock market would eventually go up at some point. All I had to do was invest in index funds. If the stock market takes a heavy dip, you will see me purchase a lot more index funds. To me, it is free money.
But to me, dividend growth investing is my love. I absolutely love the complexity and reward of researching, reading, and purchasing dividend stocks. It is an amazing feeling. So I told myself, if I continue to buy dividend stocks, I do not need them to grow in value. I will not buy a dividend stock for capital appreciation. I will use index funds for capital appreciation. I will partner up my dividend stocks with index funds in order to get capital appreciation and dividends. The perfect marriage. And it has worked out amazingly. Don’t get me wrong, if my dividend stocks do appreciate, it is a great day. The overall goal from my portfolio is 4% annual appreciation and a 4% dividend yield. Basically, instead of my index funds growing 8-10% a year, I want half of the growth to be paid in dividends. It is a pretty simple proposition and has worked out extremely well. Remember to dollar-cost average into all your positions. This is the easiest way to get ahead of the game. The major mistake I made when starting out was not dollar-cost averaging. I was using Wells Fargo which does not allow fractional shares. I remember having $400 to invest and staring at Mcdonalds, which was $200 a share then. I didn’t know if that was a good value or not. If I had fractional shares I would have put that $200 into 5 stocks such as Apple, Microsoft, AT&T, McDonald’s, and AGNC. When you diversify, you win. Also, you do not get “Analysis Paralysis”. This happens when you freeze up completely when trying to make a decision. After I starting buying index funds and dividend stocks, dollar-cost averaging, and diversifying, my results have been amazing. I am not trying to become rich, just get a solid return on my investments and create an income stream for my children.
How would you put my method into practical use? It is pretty simple. You can take my favorite index fund, VTI, and take my favorite dividend stock, AT&T, and do a 50/50 split. That is essentially my CAM/DGI method in a nutshell. Your growth vehicle is the index fund and the dividend stocks are your income stream. You could do the same with SPY (S&P500) and AGNC (monthly paying REITs). Obviously, you would want to diversify further. The screenshot from my M1 Finance portfolio is as of today December 13, 2020. When I started this portfolio in September 2020, the growth rate was roughly 6% and the dividend yield was 4.23%. It was my perfect balance of 4% appreciation and a 4% dividend yield. It so happened that the stock market went higher, very quickly in November and December. Then my dividend yield went down. However, I am still getting the same amount of dividends, just the price of all my stocks have risen. Let’s do a quick dive into my M1 Finance portfolio.
This is my overall M1 Finance portfolio. 1) This is my growth element. Funny, that all my other dividends stocks are doing better than my indexes. Over time, I expect this to change. 2) These are my dividend-paying ETFs, REITs, and bonds. I have many monthly paying ETFs in this slice, to build my income base. 3) Remember that dividend stocks pay quarterly, so I figured I would separate each slice by the months that they pay. These stocks pay Jan-Apr-July-Oct. 4) These stocks pay in Feb-May-Aug-Nov. 5) These stocks pay in Mar-Jun-Sep-Dec. I will share the breakdown of my individual slices below. Look at my diversity. Look up each stock to see what its purpose is. What sector is it in? What is the dividend yield? Only one of my stocks does not pay a dividend, can you find it? If you like my pie, I can share it with you. You can put $100 into M1 Finance, upload my pie, and watch as your money appreciates and you are paid dividends. It is an amazing feeling.
There you have it. This was my CAM/DGI method in a nutshell. As you can see, it works. I have no overall goals except 4% appreciation and a 4% dividend yield. Anything above that will be a bonus. I don’t have to touch my stocks. I just deposit $600 into this account at the beginning of the month, and M1 Finance does all the rest. Find your platform of choice. I will continue to do stock market investing series, one of which will be my platform of choice. Dollar-cost average, diversify, and research to understand each of your companies. If you haven’t started reading www.seekingalpha.com, I would start immediately. This is a good resource to start out on your journey. You will not find too many people who invest in dividends in real life. You will find tons of people who hold Amazon, Apple, and Tesla. The CAM/DGI method is built for the long haul. Please, let me know how your journey is going. Also, join in on the Cash App challenge, where I invest in the stock market every day that it is open. Look at the stocks that I am investing in. Am I buying index funds, dividend stocks, or growth stocks? Once you can start answering these questions, you will be ready to invest for yourself.
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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.
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