I am hooked on dividend growth investing. For those of you who are not familiar with this strategy, dividend growth investing is pretty simple; when they are value priced, purchase shares in companies that have a long history of paying increasing dividends.
You’ll need to do three things to be really successful at this strategy.
3 Tips To Get The Most Out Of Dividend Growth Investing
1. Purchase shares at really attractive valuations – meaning you buy stocks when they’re on sale, like after a bear market (March 2009 being a prime example). There are a few ways to evaluate when a stock is a “good buy”.
You can use a low P/E Ratio, the Graham Approach, a Value Ratio, or simply look at High Dividend Yield, to name a few. Check out Stingy Investor for the most up-to-date listing of these methods.
2. Have the discipline to wait for share valuations to become attractive before you purchase them – this means that you could potentially hold your cash for years waiting for the right opportunity.
3. Have the patience to allow your dividend income to grow over time – you are not going to start off making $50,000/year in dividend income, but over time with a dividend growth investing strategy your growing dividends will compound and you could be earning that kind of investment income in retirement.
Tom Connolly, of the Connolly Report is the guru on dividend growth investing. The matter-of-fact way of describing his methods are priceless, and the entire website is just a gem to read. Here’s a quote from Tom on the dividend growth strategy:
When they are value priced, I buy common shares of companies with a good record of dividend growth and hold them for the rising income. In 2008 our dividend income rose in spite of the turmoil by 9.9%. Did your income rise by 10% last year. Our income will be up again in 2010 too.
Our retirement plan is working. It’s not the value of the capital that’s so important, it’s the income it generates…tax advantaged income…secure income. Dividend reductions from good dividend growers are rare events.
Also, check out Lowell Miller’s The Single Best Investment, and Stephen Jarislowsky’s The Investment Zoo. Both of these books highlight dividend growth stocks as a great way to build your investment portfolio and give you growing dividend income in retirement.
The dividend investor website is terrific for researching a company’s dividend paying history, and it looks like they have recently updated their data history. They were only showing dividend growth investing history as far back as 2000, but now it looks like it goes back to at least 1990.
The stock market can be wildly unpredictable, but dividend growth investing can be remarkably stable. Fortis (FTS) has increased its dividend for 37 consecutive years. If you bought FTS in 2005, you would now be earning 18% yield on cost from those shares.
Is it any wonder why I want to replace my employment income with dividend income in retirement?