Wednesday, October 10, 2012

How to be a Dividend Winner

People who are winners tend to concentrate on setting a goal and creating actionable steps in order to achieve that goal. Losers are people who look for excuses for their failures and blame others for their own lack of common sense.

In order to be a dividend winner, an investor needs to set a clear goal of target monthly income, the timeline to achieve this goal and the steps to make it happen.

The first step in dividend investing is very simple – create a goal. The goal of many dividend investors is to be able to generate a sufficient stream of dividend income to live off of. Let’s assume that a dividend investor needs $1000/month in distribution income in ten years.

The second step is a little more complicated – creating an action plan to realize the goal. The action plan should spell out how exactly to achieve the target monthly income. This would include the specific strategy that the investor would use, the amount of money they need to save and then stress test their expectations on how the income stream might perform over time.

The third step involves accumulating a sum of money in order to start investing. This could include funds from your salary, side business or different brokerage bonuses for example. Investors who receive low incomes from their jobs might want to seek better employment by taking classes for example. Insufficient savings are one of the primary risks that retirees face, which motivates them to take unnecessary risks such as chasing high yielding stocks.

The fourth step is creating and utilizing a strategy in order to select the best dividend stocks. This strategy should spell out the entry criteria for the group of stocks, when to sell and how to structure your portfolio. I focus on dividend growth stocks which have raised distributions for over a decade, which have strong competitive advantages, can grow earnings and have a sustainable dividend payout. Having a minimum yield requirement of 2.50% also helps, although it could be argued both ways whether this is sufficient or necessary.

The fifth step involves managing the portfolio of stocks in order to achieve the target return. This involves having proper diversification by having exposure to as many sectors as possible, without sacrificing quality. Investing in dying businesses such as newspaper companies for diversification purposes is not advised. Investing in quality companies from as many sectors as possible that meet the qualitative and quantitative criteria above however should be the goal.

In other words, investors who need $1000 in monthly dividend income and who come up with a portfolio of dividend growth stocks yielding 3% today would need $400,000 in capital. However, if these dividend stocks raise distributions by 7% per year for the next decade and $1000 is needed 10 years from now, the minimum capital requirement will be almost $200,000. However, if the dividends are reinvested every year, the capital needed today will be much less than $200,000.

Some stocks which fit the profile include:

PepsiCo, Inc. (PEP) engages in the manufacture and sale of snacks, carbonated and non-carbonated beverages, dairy products, and other foods worldwide. This dividend champion has boosted shareholder distributions for 40 years in a row, and has raised them at a rate of 13.30%/year over the past decade. The stock is currently attractively valued at 18.70 times earnings and yields 3%. (analysis)

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide.This dividend champion has boosted shareholder distributions for 35 years in a row, and has raised them at a rate of 15.80%/year over the past decade. The stock is currently attractively valued at 12.50 times earnings but only yields 2.30%. I would add to my position there on dips below $41.60/share. (analysis)

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide.This dividend champion has boosted shareholder distributions for 25 years in a row, and has raised them at a rate of 8.80%/year over the past decade. The stock is currently attractively valued at 8.70 times earnings and yields 3.10%. (analysis)

Walgreen Co. (WAG), together with its subsidiaries, operates a chain of drugstores in the United States.This dividend champion has boosted shareholder distributions for 37 years in a row, and has raised them at a rate of 18.90%/year over the past decade. The stock is currently attractively valued at 14.70 times earnings and yields 3%. (analysis)

Full Disclosure: Long PM, PEP, MDT, CVX, ABT, WAG

- What are your dividend investing goals?
- My Dividend Retirement Plan
- How to generate $1000/month in dividends
- Stress Testing Your Dividend Portfolio

This article was included in the Self Directed Investing For Retirement Carnival – Final Edition


  1. Definately agree with setting goals and creating a clear path towards achieving these goals. I have set up my strategy and been working towards implementing it but I have never actually put numbers to my goal. I've just had a goal of accumulating enough assets so that my dividend income can exceed expenses one day. I think I will make alot more progress if I actually do as you say and figure out an exact amount of monthly income I want to achieve and map out a plan to do that.

  2. Since one of the premises of dividend investing is accumulating shares to keep increasing your dividend payments, I'm wondering what your thoughts are on the SIPC limit of $500k per account. If you have one account and keep reinvesting dividends, you could end up going over this limit. You don't really want to sell shares to stay under the limit since that kind of goes against the dividend approach. Curious what your thoughts are!


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