A Complete Guide to Dividend Growth Investing

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Want to get involved with dividend growth investing but don’t know where to start? This guide will help you determine if dividend growth investing is right for you.

Is Dividend Growth Investing Right for You?

Dividend growth investing is something that is near and dear to my personal financial situation. Personally, I think dividend growth investing is an amazing way to build wealth and increase your income along the way.

My first blog was all about dividend investing and I tracked my Robinhood portfolio through Personal Capital to show the power of dividends.

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I was excited to hear that Matthew Ramey of MoneybyRamey.com wanted to share his thoughts on his approach to dividend growth investing.

So, I introduce you, Matthew Ramey, as a guest poster. Take it away Matthew.

My Journey To Dividend Growth Investing

About 15 years ago, I started the foray into dividend growth investing.  I didn’t quite yet know that I would find the dividend investing strategy that would guide my investment decisions for years to come.  But I knew there had to be a better way than the path that I was currently on.  

Today I’m going to take you through a brief history on how I developed my dividend investing strategy and explore why it has worked so well for me.  

The Truth About the 401k

When first starting out in the corporate working world, I had a good knowledge base about what a 401k was and the benefits of investing money in regular intervals.  

I knew was that it was good to be putting money away for a rainy day and that if I started out young, I would have a huge nest egg in the end.

This lead me to practice the amazing saving principle of putting away 10% of my paycheck into my 401k as well as getting the benefit of vested company match. 

As a result, my portfolio started to grow exponentially.  

As my investment acumen grew, I began to explore the nuances of target-date funds which I held within my 401k. 

What I saw startled me.  The fees and expenses associated with holding money in these target-date funds were enormous. 

Not only was I being hit with a 1-2% annual fee just have my money invested with the company, but I also saw that when I retired there were all sorts of fees tacked onto my account. 

In addition to the annual percentage fee, there were the following expenses as well: 

  • A $50 distribution fee associated on each and any future withdrawal
  • A yearly account management maintenance fee
  • Fees associated with calling with questions, paperwork, email responses, etc.  

A quick analysis shows me that on a $200,000 portfolio being charged a yearly 2% maintenance fee means that I would be paying $4,000 each and every year! (more on that below)   

What I quickly saw was that the money held in my 401k was essentially designed to make someone else a boatload of money.  The active money managers wanted to take a large piece of my hard-earned money. What was I going to do about it? 

Well, I knew that I was a very good financial analyst and an astute individual at analyzing detailed financial models to ascertain trends.  I became enthralled in the world of investing and studied it any chance I could get.  

Eventually, I landed on the dividend growth investing strategy that would change my investing path forever.  

See Related: Best Dividend Income Tracking Software

Why A Dividend Investing Strategy?

In getting deeper into the world of investing, I studied many different ways to invest money into the market.  

What I found was that it seemed there were more ways to invest in the stock market than there were people ready and willing to do so. 

Each money manager had their own specific way of finding great deals in the market and I knew that I would need to find my own specific niche of investing as well. 

Being someone who is avoidant of gambling in general, I shied away from the high-risk, high-reward mindset inherent to many day traders, who usually are out to find big gains on positions they hold for short time periods.

I didn’t have the mindset of taking massive positions and hoping the payout would be well worth the reward.   

In the midst of wondering which strategy was right for me, I stumbled across two different topics: dividend investing and value investing.

My world was filled anew.  I began to view owning common stock as actually being an ownership position in the companies in which I was investing. 

I also learned the teachings of Warren Buffett in great detail, who is one of the best – if not the best – value investors to ever walk the earth.  

Though he never specifically states it, I can see that in his investing strategy, cash flow and income are king.  Whether it’s buying a re-insurer with steady income through premiums or buying Coke ($KO) with a steady, 50+ year dividend, he tends to buy into companies that are paying or will pay some sort of dividend in the future.  

Now that I had discovered the dividend growth strategy, I began to put capital to work.  The results have been stupendous. My dividend portfolio now generates $6,000+ in annual dividend income and continues to grow year-over-year through buying companies at great price points, reinvesting dividends, and holding for the long-term.  

You can find out more and live to track my dividend portfolio here.  For now, I want to take you through the added benefits of utilizing the dividend growth strategy.  

Start your dividend portfolio for free with Robinhood, you’ll even get a free share of stock when you sign up.

Benefits of Using the Dividend Investing Strategy

Utilizing a dividend investment strategy has many significant benefits.  Not only it is simple, but it has stood the test of time.

The challenge is to develop a mindset of seeing purchases as ownership.    

#1 – Mindset Change: You See You Are an Owner

One of the first things to change when you begin to invest in dividend stocks is that you start to see yourself as an owner in a business rather than trading number blips on a screen.  

This is in direct opposition to how many people view stock ownership.  The majority of the population tends to follow the ‘herd mentality’ of investing, where they sell their stocks because the market is going down, and they buy their stocks because the market is going up. 

This is a recipe for disaster as one is usually on the wrong side of the trade.  

By seeing your common stock positions as ownership in the companies you are investing in, your entire mindset towards investing is revolutionized.  

Picture this if you will – if you personally owned and operated a company that happened to be traded in an open market, would you sell the stock simply because the market went down for a few days, months, or years?  

Or would you continue to hold your position through market ups and downs, knowing that you own the particular company and that nothing could take that away from you?

I would state that many individuals would continue to hold their stock through thick and thin as they see their company as lasting well beyond the short-term downturns reflected in the open market’s analysis.  

Adopt and embrace the ownership mentality!  

See Related: Why is it So Hard to Save Money?

#2 – Annual Dividend Income Provides Your Target

One of the primary reasons why I am so enthralled with dividend investing is that it gives me a firm target to track my investing progress. 

One issue that I ran into when I first began investing was that it is often very difficult to evaluate whether or not a trade is a good one.  In most individual’s mindsets, the percentage gains or losses on a trade is the only valuation metric to gauge whether or not an investment has been successful. 

While this is a good metric for tracking investment aptitude, I found this lacking as the one pure measurement for success. 

To gauge whether or not my strategy is working based on the ups and downs of the general market did not make logical sense to me, especially when the market is trending in an extreme downward due to no fault of my own.  

Take the massive market downturns that happened in 2002 or 2008, which really has nothing to do with an investor’s acumen, but rather the poor market situation as a whole.

Investors who sold great companies on the downswing simply because Mr. Market was acting erratically missed out on the gains which have propelled those stocks to new all-time highs.  

Now, when I am looking to acquire a certain level of annual dividend income, I can focus on continuing to hold great companies through the ups and downs, so long as they continue to show good fundamentals and continue paying a solid dividend. 

See Related: Acorns vs Robinhood vs Stash – What is Better?

#3 – You Maximize Your Gains by Limiting Fees

One of the foremost reasons why I started to invest on my own was the fact that I took a real look at what active money managers really did. 

In any actively managed fund, money managers are paid quite handsomely in order to have them beat the general market returns. 

However, there are studies that have shown that investors would do better to invest in passively managed funds that track the markets than invest with active money managers as they are better able to beat the market benchmarks.   

I started to think to myself, why would I pay somebody else to do something that I can replicate on my own and that I enjoy doing?  It seemed like a no brainer to test the waters of self-investment.  

Now, I know that not everyone is in a position or has the capacity to manage their own investment portfolio.  There is much to take into account such as proper entry valuation points, monitoring of the positions, tax implications, etc.  

However, if someone has the willingness to learn what it takes to manage their investments and is willing to become the ‘captain of their own ship’, the savings from fees can be enormous.  

Just take a look at the chart below which shows how much in fees you will be paying per year based on the cost of the actively managed fund: 

Cost of Fees on a Portfolio

Let’s assume that now you have a portfolio of $200,000 with a 1.5% expense ratio per year, which equates to a $3,000 yearly fee.  

To take this one step further, what if you took that money and bought AT&T ($T) stock?  Let’s check out the results per the MoneyByRamey.com forward dividend income calculator: 

AT&T (T) Dividend Calculation - Purchase

As you can see, you would have been able to buy 76 shares, which would result in an additional 4 shares purchased per year through dividend reinvestment. 

We’ll get into why DRIP is so powerful in the next section, but this example just goes to show how one can continue to build a large portfolio by minimizing money management fees.     

See Related: How to Become Financially Literate

#4 – Compounding Dividend Reinvestment Plans (DRIP) are Powerful

For the astute investor, the ability to buy shares of dividend-paying stocks and have those dividends reinvested via a DRIP program is one of the greatest market inventions of all time. 

The idea of dollar cost averaging (DCA) has become a basic tenet of stock market investing.  DCA is where investors continue to deploy a set amount of income into the market from every paycheck no matter what the market price of the stocks happen to be.

The premise is that investors will achieve a statistical median average as their overall investment portfolio would take advantages of buying in at market highs and lows, thus achieving an average return between the two. 

This happened to be such a good strategy because most investors are not very good at timing the markets. The dividend reinvestment plan is a form of dollar cost averaging that can work for investors the world over. 

Just take a look at the power of reinvested dividends over the course of a 20 year time span: 

Dividend Reinvestment Plan Calculator Table

Dividend Reinvestment Plan Calculation

2040 - DRIP Output

As we can see from the MoneyByRamey DRIP Calculator example above, in 20 years time, our initial $5,000 investment grows to $14,562.89 portfolio value with a nice bump in dividend income and shares owned as well. 

This represents a near 180% return on our investment!  Note that this does not include share appreciation, which can be another great source of return on investment.  Not a bad day in the office.  

Start your dividend portfolio for free with Robinhood, you’ll even get a free share of stock when you sign up. Want free stock other than Robinhood? These are the other apps that give free stocks for signing up.

A few caveats about DRIP: 

  • Keep in mind this is only a tool – a lot can change and this calculator assumes a stable share price, which will never be the case.  
  • Our positions could go to $0 if the stocks we invest in do not last for the long-term.  Investing always comes with risk! 
  • DRIP programs have lost a little bit of their luster since most brokerage firms are going to $0 trades. The former benefit of having your stocks on a DRIP program was that you could reinvest the dividend payments without incurring an extra commission fee. 

Even with the caveats, I personally recommend continuing having positions on DRIP whenever possible.  The reasoning is that it is much easier and more hands-off for everyday investors to continue buying more shares in some of the greatest companies the world over on a consistent, automated basis.  

If an investor chooses to take dividends as cash and later wants to invest into new positions, that is a fine position to take, however, there is now the added element of needing to research a new stock as opposed to sitting back and letting our positions accumulate automatically. 

For most investors, I recommend having most, if not all positions, on DRIP to take advantage of continually buying more shares on a steady basis.  

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See Related: Personal Capital Review

#5 – You Can Ignore Market Fluctuations

Another great benefit of dividend growth investing is that it allows everyday investors to largely ignore the daily market fluctuations and instead continue to hold great companies for the long-term. 

Now, for those of you who haven’t been through a significant market downturn, a thought from someone who has been through the massive declines of 2002 and 2008; the market of the last two-three years is not typical of the market over the last century. 

Stocks will not always continue to rise in value like they have done recently.  There will always be ups and downs in the markets, and as the result of quantitative easing, the market corrections will be much more intense in magnitude. 

The true test will be once we do hit another downturn, what will you do? 

Will you continue to hold your positions, having faith in the companies that you are invested in? 

Or do you do begin to sell out of your positions waiting for a new bottom to develop and buy back in to your positions? 

Whatever you do, know that you cannot time the markets.  If you could, you would be a billionaire a thousand times over because you have been able to do what no one else has been able to do on a consistent basis.  

If you adopt a dividend growth strategy, you take a different mindset.  Now when I buy a position in a company, it is my goal to own that company for my entire lifetime.  

By adopting this mindset, I am able to see market downturns, not as situations where I must now panic sell the companies that I own, but rather as circumstances where, if I have extra cash on hand, it is now time to buy more of those amazing companies at discounted prices. 

I have come to see that when the markets are trending downward, stocks are now going on sale.  Instead of panic selling, I actually use these opportunities to buy even more shares in these fantastic companies!  

Reinvesting dividends is a beautiful thing.  

Start your dividend portfolio for free with Robinhood, you’ll even get a free share of stock when you sign up.

See Related: 11 Best Robinhood Alternatives

The MoneyByRamey Dividend Portfolio

I have found that the results of implementing a dividend growth investing strategy have been well worth the effort of learning and executing the strategy on a daily basis. 

My portfolio is now at roughly $180,000 with $6,000+ of annual dividend income.  Keep in mind that the dividend income I receive is being reinvested each and every month, which acts as a form of compounding interest (i.e. the eighth wonder of the world)!

Now, $6,000 that might not seem like very much in the realm of total income, but keep in mind that when averaged out over the course of a year, it is $500/month of completely passive income.

Also not included in this number is the rising value of the shares I own or the increased value through share accumulation.  

If you want to learn more about building your dividend portfolio or passive income generation in general, visit the dividend learning center today for the latest and greatest information.  

In addition to dividend investing, I continue to write about money management strategies with an emphasis on building passive income sources.  

I’m always building out new tools for my fellow investors as well as writing books and creating courses that will help you in your journey towards Financial Freedom!  Upward and Onward my fellow investors!

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