Friday, April 15, 2016

Why I Chose Dividend Growth Investing

This is a guest post from Roadmap2Retire blog, which documents the retirement journey of a dividend growth investor from Canada.

I am an advocate of dividend growth investing – an investment model where I own part of a strong company instead of renting a stock for a relatively short amount of time. I believe shareholders should compensated by companies sharing their profits, while investors stay invested instead of selling and exiting an investment to realize any profit. In addition, I want my investment dollars working harder and providing me increased profits year after year. This basic principle has led me to the path down dividend growth investing and find it a sustainable reliable investing model – whether in accumulation phase or retirement phase.


Early Investing years

As with most investors starting out, I made my mistakes by chasing growth companies – paying no attention to valuation. My first investments were via expensive mutual funds – where I paid an exorbitant fee for the privilege of investing. Little did I know that those 2 - 4% management fees were going to impose a hefty drag on my performance. But as I got more familiar with the investing world, and got more educated over the years, I started dabbling in individual stocks. This was right around the time when the financial crisis hit the US (and world) markets circa 2008. What did I end up with my first investments? Banks & Financial companies! While the correction was ongoing, I kept buying companies such as Washington Mutual, Wachovia, Merrill Lynch, etc. As most investors are aware, these institutions do not exist anymore or exist as a faded memory within a different organization. I shared a post documenting these mistakes here.


Making such mistakes early on in my investing career was a great lifelong lesson. I realized that even the “experts” in the media didn’t know what they were talking about and no one can accurately predict the future. Each investor should perform his/her own due diligence and take risks accordingly. It is important to remember that there are always risks involved when it comes to investing. There is no free lunch!


Dividend Growth Investing

Once I realized that investing via growth-only companies that are always in the limelight of the media wasn’t working for me, I happened upon the beauty of dividend growth investing ( such as this blog www.dividendgrowthinvestor.com). This model has formulated my mantra for building my portfolio over the course of last decade or so. By choosing to invest in dividend growers, I am picking a small segment of the companies that I believe will perform better than its peers in the industry group. By owning a fraction of the company, I am not renting shares that I eventually need to sell and exit my investment to see any profit. These companies share a portion of their profits with me on a regular basis.

This is a wonderful model for investors. You invest in companies and sit back and collect the dividends quarter after quarter and each year, those dividends increase, hopefully beating inflation rate. By subscribing to this idea, I can stop worrying about what the overall market is doing. Whether the overall market is up or down doesn’t matter. All I care about is whether my businesses are healthy and growing to generate increased profits year after year.

The traditional understanding has been to look for aggressive funds when younger and grow the investment over the accumulation phase. As investors get closer to retirement, they are encouraged to switch to fixed income funds. There are a few problems with this model – just look at what happened during the financial crisis. Investors suffered major losses during the crisis in their stock portion, and if you happened to retire around that time, the drop in interest rates did not (still do not) provide any meaningful income.

With dividend growth investing, the idea is to simply receive dividends on a monthly, quarterly or annual basis. If you are still in accumulation phase, reinvest to snowball the investment and if the income is needed (i.e., in retirement) use the cash to spend, without touching the principal investment. By following this model, I am building my own pension without relying on any external entities.

Advantages

There are a lot of advantages when it comes to following this dividend growth investing model.
One of the most important one is: it pays to be patient. Many investors, including institutional investors, are forced to swing even when market conditions aren’t ideal. This causes erratic behavior and the need to time the market. As the popular saying goes, “It’s not about timing the market; it’s the time in the market that counts”. Time is the most important aspect when it comes to growing your investment. And dividend growth investing allows investors to sit back, be patient, and let the investment grow year after year.

Another major advantage that I love about Dividend Growth Investing is that there is a safety net involved when I overpay for an investment (within reason). I do not need to worry about calling a bottom for a stock. If I overpay for a stock, time takes care of the mistake by allowing me to collect the dividends while I wait for the market to do what it does best.

There are more advantages such as saving on fees, cutting the middle-man out by investing directly in a company etc. I share my thoughts regularly on my blog at Roadmap2Retire. Be sure to stop by and connect with me there. I look forward to hearing from you on what your thoughts are on dividend growth investing.

9 comments:

  1. Thank you for the opportunity to guest post on your site, DGI. I hope your readers find value in the post.

    Best wishes
    R2R

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  2. My former company cashed out my future pension with a lump sum payout into an IRA at the end of 2012. With the 2008 market crash in mind, I began buying dividend stocks to recreate the lost pension. Instead of waiting for my first pension check in 2017 I immediately began receiving and reinvesting dividends each month. Despite the usual novice mistakes I will receive more tax-free dividends in 2020 than what was promised in the taxable pension (which would never increase).

    My pension only covered my lifetime so my wife had no guarantee of future income. With dividend investing, we and our children expect to enjoy more tax-free stress-free income that increases each year without needing to sell any of our stocks. All made possible through DGI.

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  3. Great intro article on DGI. I'm sending this to my nephew just beginning his career with a Masters in Engineering. cw

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  4. What a great article, it's very inspiring. Keep on the good work and role that snowball!

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  5. After being a long time value investor focused on capital gains, I have come to the same conclusion about dividend growth investing. I am slowly moving my portfolio that diection. It's just taken me longer to get there (typical Financial Slacker).

    Great article.

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  6. Hey R2R,

    It was nice to read what initially inspired you to invest in DGI type stocks. I like the idea of time making good your investment (I think Buffett said something very similar) :)

    Tristan

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  7. Thanks for the well wishes and Im glad to hear that everyone is liking the article. Thanks for commenting and sharing your views.

    cheers
    R2R

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  8. Do you ever feel like Dividend Investing is the lazy man's investing? I'm a dividend investor myself and my only responsibility is to buy solid dividend stocks and sit back. I literally do nothing else. I collect my $20 in dividends each month (it steadily increases), say thanks dudes to my dividend portfolio then party like it's 2016 while I buy more stocks. It's like Shampoo, rinse and repeat.


    I should have started when I was five, or at least 15. I was definitely great at doing nothing back then. =P

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  9. Thanks for sharing this article. I think it is great that you are honest and willing to reveal your early mistakes as well. It can show others that everyone makes mistakes when investing, but that's okay since you can learn from them.

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Questions or comments? You can reach out to me at my website address name at gmail dot com.

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