When I first began to read about passive income in June 2019, I was intrigued by the Dividend Growth Investing (DGI) community. They seemed to be hardcore dividend folks who had a good pulse on how to create passive income.
I wrote an article on dividend growth investing called “Stock Market Investing 102: Dividend Growth Investing.” By the way, you can read the other pieces in the Investing for Dividends series here (101, 102, 103).
Some of the main principles of dividend growth investing are investing in strong, blue-chip companies with solid histories of paying dividends. Some examples are McDonald’s (MCD), Johnson & Johnson (JNJ), and Proctor & Gamble (PG).
Good Debt vs. Bad Debt
I love investing in these strong companies; however, they don’t pay massive amounts of dividends. In fact, the average dividend yield of these three companies is 2.5%. Which is is not bad at all, but I wanted more yield.
I was still a young investor, and I was searching for more yield. I started buying REITs (read REITs part 1, 2, 3, 4). I even bought some high-yield ETFs. I was very excited with my yield results until March 2020 rolled around.
In March 2020, my portfolio completely tanked. It seemed that most people had a terrible March; however, everyone’s portfolio started to recover. Mine remained in the red or negative. Almost six months later, I started researching the ETFs I was holding.
As it turns out, my ETFs tracked the banking sector. As I learned later, the banking sector struggles in low-interest-rate environments. Most of my portfolio was tied to banks, and they were not recovering well.
At this point, I sold most of these bank sectors and moved that money into Vanguard Total Market ETF (VTI). VTI allowed my entire portfolio to ride the wave of recovery and perform very well against all odds. At that moment, I loved adding index funds to all my dividend portfolios.
You see, for me, at least, I am looking at the overall health of my dividend portfolios. As long as my portfolio is growing and paying me good dividends, I am a happy camper. Index funds ensure that my total portfolio is continually growing along with the stock market.
Don’t Gamble Your Retirement Away 2
On top of this growth, I am getting all the benefits of compounding, dividend raises, and dividend growth. Compounding is the 8th wonder of the world; I am pleased to be still able to invest in companies like McDonald’s and Johnson & Johnson.
Here is a look at one of my DGI portfolios, Charles Schwab, which most closely resembles a proper DGI portfolio. I have bought primarily blue-chip stocks. Let’s take a look.
We see from the top blue-chip stocks primarily that the overall portfolio is doing well. It has an overall growth of +7.39%. I always shot for at least 4% growth (or capital appreciation) and 4% dividend yield. My thinking is that as long as my portfolio can appreciate, or grow, at 4% annually, it can beat inflation. Then I can remove all my dividends, free and clear.
The top section of the portfolio houses my blue-chip stocks from all sectors. AT&T (T, telecommunications), Altria (MO, tobacco), Apple (APPL, computers and software), Costco (COST, retail services), Johnson and Johnson (JNJ, pharmaceuticals), McDonald’s (MCD, restaurants), Phillip Morris (PM, tobacco), Public Storage (PSA, self-storage REIT), Realty Income (O, REIT), and Verizon (VZ, telecommunications).
Becoming Insanely Productive During the Magic Hours
These are notable companies, and I am proud to own all of them. But, I can juice more yield from the portfolio in the bottom section. I added two of my favorite high-yield ETFs and, of course, VTI. Global X Superdividend ETF (SDIV) is an international high yield fund. When the market crashes, this baby will fall hard as well. However, I find using those times as a tremendous buying opportunity. I was able to buy into this ETF at a 12% dividend yield in my other portfolio. Schwab is a dividend growth ETF (SCHD), so it is basically like your own blue-chip DGI fund. It is nice because you do not have to pick individual stocks.
And finally, you have VTI. I consider VTI my core holding in all my dividend portfolios. It is challenging to go wrong with this index fund. Some other index funds I own are Dow Jones Industrial Index (DIA), the NASDAQ (QQQ), and the S&P 500 (SPY). They all have their different sectors in which they specialize.
Mailbox Money: The Power of Dividends, Royalties, and Rents
The overall moral of the story is that I look at each of my dividend portfolios as one total package. If the package is doing well, I rarely have to dig into the individual stocks to see what is going wrong. When the stock market has a good day, my portfolio has a good day.
Think of it this way. If you go on a diet and you are losing weight, you continue to follow the diet. However, if you have a diet and are not losing weight, you have to evaluate everything you are eating to see where the problem lies.
Boring Investing is Good Investing
Using index funds, I rarely have to evaluate my individual stocks. I keep abreast of their news from time to time, but overall, I just keep adding to my dividend stocks in my portfolio. Then, once I see my VTI is becoming a small percentage of my portfolio, I buy more VTI (or other index funds).
Buying index funds have made my dividend investing carefree and convenient. I remember before I used index funds, and life wasn’t so rosy. I had to constantly go into my stocks to see who my laggards were. I did not enjoy that. I like seeing a positive overall portfolio and significant dividends hitting my account. Index funds allow me to do this.
How about you? Do you add index funds to your dividend portfolios? Or do you consider it blasphemy? I hope I provided some value to your thought process of dividend investing. I have never read an article about combing DGI with Index funds, so hopefully, it is enlightening. 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.
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