Can you Imagine living off of a stream of income in perpetuity? Imagine handing down this stream to your heirs when you die. This is what you can accomplish with dividend Growth investing.
What is DGI?
Dividend growth investing is an income strategy of investing into companies with a barrier to entry (large moat) and consistent history of increasing dividends at a rate higher than inflation.
The 4% Rule
First I’d like to discuss a more “mainstream” way of retirement that is called the 4% rule. There are countless articles and magazines touting this as the ultimate way to set up your retirement. Basically the 4% rule means you are selling off 4% of your portfolio each year to use for income.
I don’t like this for a few main reasons:
1.) You are reducing your position sizes of your holdings. You are basically cannibalizing your portfolio to provide your income. Each year you have less and less shares of the company. Imagine having an apple tree and instead of picking the fruit each year, you actually chop off some limbs.
2.) In the event of a major downturn in the market, you will be forced to sell your holdings at prices when the underlying stock could be undervalued. This could severely hurt you in the long-run. Imagine having to sell large portions of your portfolio during 2009 when stocks were severely depressed.
3.) If your portfolio doesn’t increase in value more than 4% each year, you actually have less money every year after your withdrawals.
Dividend Growth Investing
Dividend Growth Investing, DGI, is an approach that involves buying dividend paying companies that have histories of increasing their dividends. These are companies that also should have a large moat, or barrier to entry.
Imagine having a fruit tree. The dividend paying companies I purchase are sort of like the limbs and branches that make up the tree. The dividends produced are much like the fruit that is produced every year and can be picked without harming the tree. Not only is my tree growing larger, due to purchasing more companies, but the fruit (dividends) produced, yields more each year as my tree grows.
This approach provides a growing income stream each and every year without having to trim the branches on my tree (sell off shares). My tree is growing and providing more fruit (dividends) each and every year. This strategy can work into perpetuity and you can pass your stocks to your heirs for generations. This is the main reason I’m attracted to this strategy.
You Have to Spend too Much Time Researching Companies
Some naysayers will claim this. I currently have about 40 companies in my portfolio and don’t plan for it to get much larger. I don’t spend countless hours and hours of research. With all of the available tools and resources now available, I think it’s safe to have a portfolio this size and be able to safely monitor them.
It’s not like I’m buying speculative positions in this portfolio. I’m buying large, blue-chip companies like Coca-Cola (KO), Johnson & Johnson (JNJ), Pepsi (PEP) and Unilever (UL) to name a few. These aren’t the kind of companies you have to watch every single day. You could honestly get by with reading their quarterly reports and just monitoring their dividend payments.
As long as they increase their dividends at a rate higher than inflation and their payout ratio or free-cash flow payout doesn’t become unreasonable, I don’t really worry about these companies.
Holding dividend growth companies helps me Sleep Well At Night. There was a time before I found this strategy that I was chasing the next hot tech company. This produced losses and sleepless nights. Fast forward to now and I’ve accumulated a portfolio of half a million dollars made up of many dividend aristocrats. I don’t own any bonds and just one ETF in my IRA which just tracks the S&P 500. The majority of my portfolio is single stocks of some of the largest, most profitable companies in the world with long histories of paying and increasing their dividends.
So what are you waiting for? Create a business plan and start investing! My original business plan is located here.
Buy, Hold Long says
Nice post mate. Dividend growth investing is key to an early retirement. Good luck with you future endeavors.
Buy, Hold Long recently posted…My Retirement Superannuation Performance
All About Interest says
I agree. I certainly love seeing higher dividends come in each month. Good luck to you as well.
Thanks for stopping by!
Great post. this reminds me why I am also a dividend growth investor.
FiscalVoyage recently posted…Passive Income for September 2018
I’m not sure you understand the 4% rule, which is outdated already. It’s more like a 4.5% rule, based on a 30-year life expectancy.
Let me simplify the numbers, for obvious reasons.
If you have a $600,000 portfolio, it will produce $60,000 in interest every year on average. That’s $5K per month to live off, and the money will never shrink, nor would you have to sell 4% of your holdings. But if you were to sell 4%, that’s another $24,000 per year, so you’d have $7K per month to burn. You think you’ll need that much in retirement?
All About Interest says
I believe you are mistaken. The 4% rule is just that, a withdraw of 4% each year. It’s a simple concept.
This is from investopedia, “The 4% rule is a rule of thumb used to determine how much a retiree should withdraw from a retirement account each year. This rule seeks to provide a steady income stream to the retiree while also maintaining an account balance that keeps income flowing through retirement.”
I’d love to know how you are achieving a safe 10% return on the $600,000 portfolio? I don’t know any interest bearing accounts that would pay that amount. In fact , anything yielding over 4 or 5 % typically comes with a lot of risk , i.e. low-quality REIT’s.
I’m just not understanding your numbers.