Monday, March 31, 2014
How to identify your dividend investment goals
You have saved up some money after working hard for many years, and now you have decided to put it to work. You see hundreds of articles on investing online, and hundreds of strategies that promise you everything. You are getting information overload. How should you select your strategy?
The first goal when selecting your strategy is to determine what your desired end result should be. For most investors who want a strategy that would help them in accumulating a certain level of target monthly income, dividend investing might be the best solution. The goal should be very specific, and should incorporate as much information as possible to fit the objectives of the investor.
As a result, the goal of earning $1000/month in dividend income is more specific as accumulating a nest egg of $300,000. This is because accumulating a nest egg of $300,000 does not automatically translate into the desired target monthly income to meet expenses, and does not discuss how to pensionize this asset.
For example, my goal is to generate a sustainable level of dividend income, which maintains its purchasing power over time, at the minimum. This would be achieved by creating a diversified dividend portfolio, consisting of quality dividend growth stocks that I try to acquire at attractive valuations over time.
Your dividend investing goals should take into account things like amount you can put to work every month, the time until you retire, as well as make reasonable assumptions about investment returns (initial yield, earnings and dividend growth).
For example, if you put $1000/month in a portfolio of dividend paying stocks that yield 4% and grow distributions at 6% per year, you can expect to earn $1000 in monthly dividends in 12.5 years. If you increase your contributions to $2000/month, you will be able to generate $1000 in monthly dividend income in only eight years.
The types of dividend paying stocks, which could be part of such a portfolio could include:
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products.The company has managed to boost distributions from 46 cents/share in 2008 to 94 cents/share presently. Currently, the stock yields a very reasonable 4.60%. Check my analysis of Philip Morris International.
Unilever PLC (UL) operates as a fast-moving consumer goods company in Asia, Africa, the Middle East, Turkey, Russia, Ukraine, Belarus, Europe, and the Americas. The company has increased dividends for at least 15 years in a row. The stock yields 3.65%. Check my analysis of Unilever.
Kinder Morgan, Inc. (KMI) operates as a midstream and energy company in North America. The company has managed to boost distributions from 30 cents/share in 2011 to 41 cents/share presently. Currently, the stock yields 5.30%.
In addition, that investment plan should discuss more issues, such as where to start your search for investment opportunities, how to analyze them, when to buy, how to manage your portfolio and when to sell. Over the next few weeks, I would discuss each one of these bullet points, and walk you through the complete dividend plan, from beginning to end.
Full Disclosure: Long PM, UL, KMI
- My Dividend Goals for 2014 and after
- Why do I keep talking about the same companies all the time
- How to retire in 10 years with dividend stocks
- How to accumulate your nest egg
- Warren Buffett’s Dividend Stock Strategy
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