There are tons of different stocks and investing styles out there. I outline the reasons why I invest in dividend growth stocks and believe it to be the very best way to achieve my financial goals.
You get paid in cash regularly
Simple – You own a part of the company through the shares you bought and you get paid in cash when the company distributes its earnings through dividend payments. You should develop an owner’s mindset when investing for dividends. You are a part-owner of the company and you get rewarded accordingly.
Although investing requires upfront research and capital put to work, reaping the rewards through cash dividends is a truly passive source of income. I like to think of it as sending my portfolio to work, instead of me, every single day.
You can find the 13-Step Checklist that I use for analysing dividend stocks here.
You don’t need to sell your stocks to make money
This is an important reason why to invest in dividend growth stocks. Investors looking to make money in the stock market through trading (buying and selling stocks) need to get 2 decisions right – buying and selling. As stock prices are constantly moving due to all sorts of economic and political news it can be extremely stressful to look at the prices moving up and down. As dividend investors we only need to get 1 decision right – which companies to buy that have strong dividend growth and safety characteristics. This way all we have to do is keep collecting our growing dividends and not worry about what the stock prices do in the short term as we would like to hold our stocks forever. As long as the company’s business performance is strong – stock price movements do not matter to dividend investors.
Growing dividends protect you from inflation
Think of inflation as a hidden tax. Every year you lose on average around 2% of your money that you have saved up. If you have 100.000€ saved up, next year it is worth 98.000€ ,the year after that 96040€ as the price of living goes up. That is one of the reasons why you should invest, instead of save your money, as the dividends paid out from your investments are likely to increase faster then the average rate of inflation. Not only are you protected from inflation – your income and buying power will increase in time!
Re-investing dividends compounds your wealth
This is where the magic happens. Eventually when we retire, we want to live off the dividend money we receive. But during our career we don’t need the investment income yet. That means we can re-invest the dividend cash we receive. That dividend money will buy us more shares in companies. As we own more shares, we will receive even more dividends the next time. Our dividends are working for us, to get more money through dividends!
Your income will increase without any effort
There is no such thing as a free lunch when it comes to investing. You need to educate yourself and thoroughly research the companies that you are interested in. The main goal of this is to develop your personal investing criteria and find companies that fit the bill. You also need to risk your hard-earned cash by investing in the stocks. But if you do your due diligence and put up the capital, it is a great position to be in. Your income will grow yearly through the dividend raises. Having constructed a strong and diversified portfolio, stay committed to your investing plan.
Dividend stocks have historically performed better then overall stock market.
As we mentioned earlier, dividend investing is not about looking at the stock price every day in hopes of selling it for a quick profit. But it is only natural to be interested in the company’s growth. In the long term it reflects the company’s earnings trajectory. You will be happy to learn that the Dividend Aristocrats (list of companies with more then 25 years of consecutive dividend growth) have beat the S&P 500 index (tracking 500 of the biggest US companies) in the last 10 years. Over the period ending June 30, 2019, the S&P 500 Dividend Aristocrat index has returned 16.28% on an average annual basis. That compares favourably to the S&P 500 index which has returned 14.70% annually during the same period.
Dividend growth policy makes management more disciplined
We are interested in companies that have shown the willingness to pay a regular and increasing dividend for many years. When a company has an attractive dividend policy, it attracts investors which is good for the company. Management needs to be able to sustain that dividend and its increases to keep the investors happy. To achieve that they focus on allocating the company’s funds in a more disciplined manner. That means focusing on cash flow growth, instead of building a business empire.
Summary
I want to enjoy the fruits of my investments (dividends) without cutting down (selling) a part of the tree that grows them (portfolio). This is why I invest a large part of my net worth into dividend growth stocks. I want to live off the dividend income my portfolio produces. I would also like to leave my kids and grandkids this income-producing portfolio of stocks. It will hopefully provide income for my future generations as well.
If you have any questions, don’t hesitate to get in touch through the contact me page. Wish You all successful investing!
