I want to eventually replace my income with the passive income of stock dividends. There is nothing better than being paid just for being alive.
Normally, I look for the best deal. How do I do this? I do the following:
- 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:
- 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....
- 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 65% or so. If they are up near 100%, they may cut the dividend.
- 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 particular 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.
But with the amount I was able to invest, I decided to once again increase ALL of them to a new level - (my "full position")
My former full position was a $4,000 holding. I would take my time and buy until I made it to that $4K level and just ignore it and let it ride and move onto the next good deal.
I wanted to spread out my holdings fairly evenly. This strategy enabled me to own over 100 companies.
I decided to bump my full position to $5,000 per holding. Honestly, I ignored my normal screening rules and just turned up the volume! If some were priced too high, at least 4/5 of the holding were good deals. And after holding them for a decade or more, the higher price won't make much of a difference.
So I bought and bought until almost all of my holdings are at $5K. A few I have are higher, but those are the ones I buy to match my annual spending, like Target (TGT) and Kroger (KR)
I talk about that strategy here: Annual Spend = Share Buy
I made 101 purchases totalling $84,367.24. Whoa. Those purchases added $1,812.46 to my annual dividend income. That's a bit of a lower rate (2.15%) but do note that I already owned large positions in the higher yield stock. And almost all of these investments increase their dividend annually.
Here's the summary of my buys
Now, I will begin to reap the harvest of these dividends and make this snowball get even bigger. I really loved evening these holdings out. I would often see a dividend payment of $2.25 and wish I had more shares. Now I do and will see $35 - $50 per holding per payout. Yay.