Benefits of a Dividend Growth Investing Strategy on the USA Stock Market

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Benefits of a Dividend Growth Investing Strategy on the USA Stock Market

Published Date: 2018-02-08 | Source: Share Picks USA | Author: Bruce Ingram | Comments

Benefits of a Dividend Growth Investing Strategy on the USA Stock Market

The US markets have been in a turmoil this past week. By Wednesday morning 6th Feb 2018 the S&P 500 dropped more than 7% in one week. This decline serves to emphasize the benefit of my investing strategy. My dividend income has not been affected. The stock prices dropped, dividends stayed the same. I can now look for some bargains to buy to bolster my dividend income. Doing the math a stock that was paying a $4.00 dividend and quote price of $100 was paying a 4% dividend. The stock drops 10% its quote price is now $90 the dividend is still $4.00 Buying this stock at $90 it will give you a 4.4% dividend

Dividend Growth companies are generally well-run companies that produce a reliable, inflation beating source of income. They have lower price fluctuations compared to the general market. Research shows that over a long period of time these companies outperform non-dividend paying companies.

Over 50% of investor's returns on the S&P500 index are due to dividend income.

Quality dividend growing stocks will continue to pay increasing dividends (or income) even during a recession.

Dividends are usually paid out quarterly, with some companies paying out dividends monthly providing a regular growing income.

Most investors can be broadly broken down into two categories:

  • Those that are in the accumulation phase, normally pre-retirement
  • Those that are in retirement.

Once retired if you invest in an index tracking ETF for example you may need to sell shares to meet your retirement income as their dividends are about 2.5%. However, if you invest in a dividend growth portfolio you can use the growing dividends as your income source without touching the capital value of your stocks. In this way your portfolio is guaranteed to outlive you and give you a salary increase every year.

In the accumulation phase you should re-invest your dividend income thereby getting exponential growth on your portfolio. Albert Einstein once noted that the most powerful force in the universe was the principle of compounding. If you invested $100 per month in Johnson and Johnson (JNJ) in January 2003 to December 2017 (15 years, through the 2008 crash) and re-invested your dividends, you would have invested $18,000. Your shares would now be worth $45,969. If you had started 5 years earlier your investment would now be worth $82,800. Targeting a portfolio that produces a 4% dividend and where the dividend grows >6% per year will produce even higher gains. JNJ currently pays a dividend of 2.58% Up 7% this week.

Dividend income can either be re-invested into the same stock or a different dividend growth stock

It is a well-documented fact that trying to time the market is the biggest risk to achieve your long-term goals. Focusing on the growing dividend income and not the share price helps to take the emotion out of investing. You will continue to earn an income irrespective of share price fluctuations.

Selling shares in a rising market for income is OK. However, the need to sell shares during a falling market in order to cover living expenses may result in you outliving your portfolio. This can be very stressful. Dividend growth investing if done properly will prevent this happening.

Dividend growth investing is a fairly passive way of investing. Once you have established your portfolio it does not require a lot of time to monitor. Monthly, quarterly and annual reviews are all that is required.

Dividend growth investors are just that: People that invest in companies listed on the stock market, not people that trade or speculate on the stock market. Invest in companies not the market.

If I purchase any shares during this market pull-back I will discuss them and the reasons why in the next article.



Disclaimer: Please note that I am not a Registered Financial Planner. The articles I write are based on my own personal research and for my own use and is not to be construed as financial planning advice. At all times readers are urged to exercise caution when investing in any financial instruments, to do their own research.


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