Wednesday, September 4, 2019

A STARTING GUIDE TO DIVIDEND GROWTH INVESTING


Are you one who is looking to begin investing in dividend growth stock?   Buying pieces of companies that have a long track record of raising their dividend, this increasing your return rate moving forward.

Yes, do some thinking..

Starting up a dividend growth investment portfolio can be a daunting task.
Where do I start?
Where do I do reasearch?
What broker do I use?
What do I do with market fluctuations?

OMG I AM SO SCARED.....
Calm down Becky...

Let me try to help you through this bit by bit.  It's not nearly as scary as it seems. 

Once you get the ball rolling, it becomes a real fun side hustle.  And with some determination, it can go from a side hustle to a main source if income.  That main source of income can result in financial independence and and escape from the 9 to 5 life. 

THE FOLLOWING  IS IN NO WAY AN OFFICIAL ADVOCACY OF ANYTHING OR ANY COMPANY.   THIS IS ONLY FOR ENTERTAINMENT PURPOSES.  YOUR INVESTING IS YOUR DEAL, YOUR GAINS, AND YOUR LOSSES.  OK?  ..OK!  

So what do I do first?

  • Open a brokerage account.  You may already have one for a 401K.  Feel free to use that.   Here are some thing to consider when picking a brokerage:
    • Fees.  Does the broker charge per trade? How much?  Is it worth the services provided?   Some online brokers are free of charge, like Robinhood.  Others have a fee per purchase or sale, such as TD Ameritrade, Merrill, and E-Trade at $6.95 per transaction and Fidelity and Charles Schwab at $4.95.   A downside to Robinhood is they provide no research.
  • Where do I research?:  
    • You'd be benefited by having a broker that provides easy to read data that can be understood by a beginner.  I am heavily into looking at the data: dividend history, financials, expert recommendations, etc.    I first began with E-Trade and found it a bit clunky.  Then my employer had aN employee ownership program through Fidelity.  I found the research super easy to understand.  I then cashed out my shares at E-Trade and exclusively use Fidelity ever since.  I do have a Robnhood account, but am not a fan of having zero research.   
    • I also like some online sites that analyze stocks, like FAST Graphs or Y Charts.  Many of them do charge a membership fee.   I used to be a member of a few of them, but found my brokerage my preferred  research center and cancelled all my memberships.
    • A great free website I do reccomend is "The DRiP Investing Resource Center".   You can see a myriad of Excel that list out companies that are "Dividend Champions" (companies that have increased the dividend for 25+ years.)  These spreadsheets are highly detailed ad offer much more info than I could ever know.  But at least it is a starting point to find a list of companies.
  • Make a list of companies.
    • Do some screening of what you are looking for.  Here's are the things I seek out when looking for a company to invest in
      1. Rate of dividend increases.  Look at the 5 year rate of increase. Look for a payout increase that beats the rate of inflation.  If it is quite low, then they are not really a dividend growth company....
      2. Payout ratio:   How much of their net income goes to the dividend.  This is a big marker for dividend sustainability.  Look for companies that are under 60% or so.  If they are up near 100%, they may cut the dividend.
      3. P/E ratio:  What is their value?  The lower the P/E ratio, the better rate the dividend will be.  It is the ratio of a company stock price to the company earnings per share. Each industry is different.  If the P/E ratio is high, the company may be overvalued.  You could see the price drop (and see the dividend rate go up as the price drops..)  It's a way of looking for value.  I look for those with a P/E under 20 (or once that is at the very least lower than the industry average.
  • Got a list of companies.  Now What?
    • Take the list you have and see which company is a bargain at this point.  Try to steer clear of ones that have just hit an all time high.  Prices ebb and flow, and with some time you will see which ones are undervalued.  At this point, you may want to see which ones the experts recommend at that perticular time.
  • Bought shares.  Now what?
    • HANG ONTO THEM.  This is why you are doing this....Dividend growth investing is a long term deal.  It's buy and hold.  The few times I sold shares are when the company cut the dividend dramatically and was no longer worth owning. 
    • Buy more shares of more companies.  Do not put all your eggs in one basket.  when I first began, I spent all my money on one company, AT&T.  Big dividend, what could go wrong?   Well, when the price drops, it makes a huge impact. Not on the dividend, but the portfolio value.  I soon learned to spread out and diversify.  The more companies, you own, the larger the moat you have around you, and the more cushioned you are from a company going tits up.  For example, if you own 25 different companies and one fails, you only lost out on 1/25th of your portfolio.   I am up to 92 companies.   At this point, I do not care how high or low a company goes (a long as it keeps the dividend).  
    • Collect Dividends.   Collect enough to buy more from your watch list or your portfolio. the more you save at one time, the less impact any fees have to your cost basis.  

If I were to start all over doing this thing, these are the 10 companies I would start with.  Once again, this is not a professional endorsement.  This is merely what I would do.   I do have positions in these companies.

  1. AT&T  (T) - you can't beat a 5.77% dividend.  Their growth does not beat inflation, but the rate is so damn big...
  2. Proctor & Gamble (PG) - another company not going anywhere..
  3. Realty Income (O) - they pay a monthly dividend.
  4. Aflac (AFL) - 37 consecutive years of increasing the dividend.
  5. McDonald's (MCD) - 43 years of increasing dividends!
  6. Coca Cola (KO) - 57 consecutive years with increased dividends
  7. Boeing (BA) - solid company not going anywhere
  8. Microsoft (MSFT) - also not going anywhere.
  9. Apple (AAPL) - They are overdue for a massive dividend increase.  (My hunch)
  10. Disney (DIS) - How can you turn down Star Wars?!
After that, I would look into energy companies and financials (like Bank of America).

Remember, time is your friend.  The longer you have, the more it will increase.  Just be patient and become a share hoarder.  

It may start quite small, but as they increase, you will see it begin to snowball.  I went from $28K to having over $375K in 5 years.  Yes, it took some regular cash contributions, but the little snowball has gotten quite huge.

Any comments or questions?

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