Having heard no nays, here it comes.
I think it is important for people, if they are investors, to have goals. My goal is to generate a reliable and increasing income stream from financially strong companies that have a history of increasing their dividends each year. I am a dividend growth investor.
There, that is the easy part. Now, what do I mean by that? I look for companies that pay at least 150% of the average dividend for S&P 500 companies. That is about 2% now, so I am looking for a dividend yield of about 3% or higher at the time I purchase the stock. By financially strong I generally look at the Morningstar credit rating or the S&P bond rating. I want companies rated at least BBB+, and most of the companies I hold are higher than that. That is not all I look at, of course, but I am going to avoid the details of the additional research I do when making a decision about whether to invest in a particular company.
What level of dividend growth am I look for? It depends, in part, on the type of company. For most companies I am looking for a multi-year average annual dividend increase of at least 5%, and most of the companies I own have higher dividend increase rates. For regulated utilities, Real Estate Investment Trusts (REITs) and telecommunication companies (like Verizon or AT&T, for example), that typically pay higher dividends, I will accept a lower rate. For the record, I do not own shares in Verizon or AT&T.
I guess the next question might be, why do I invest in this way? Well, the answer is multi-part. First, some context: Kathy and I have enough income from our pensions and Social Security to meet our monthly budget. I view that as the fixed income part of our retirement portfolios – what some people might get from bonds or annuities. We do get annual cost of living increases with these sources, though those are limited to a maximum of 2% in the case of one of our pensions and 1.5% for the other two.
We have some money in IRA accounts, funds that were rollovers from the defined contribution portion of our hybrid pension plans in Oregon, 401K plans, and from contributions we made to the accounts in years when we could afford to. This is where the dividend growth investing happens. The income generated by these accounts increased by about 11% last year.
The increase came from a combination of dividend increases announced by the companies we hold stock in, and by reinvesting the dividends back into the shares of the companies that paid them. By reinvesting (buying more shares with the dividends), we have slightly more shares the next time when the companies pay a dividend, which creates a small increase in the dividend payment. The reinvestment is set up to happen automatically with our brokerage firm, and there are no transaction fees associated with the re-investments.
The plan is to continue reinvesting the dividends for as long as possible, hopefully until I have to start taking the required minimum distributions from the IRA in another 8 years, though we could start taking some of the dividends as cash before then if we need or want to.
Our plan is also to avoid being in the position where we have to sell shares in the companies we own in order to generate income – in other words for the dividend income and our pensions/Social Security to adequately fund our needs. We could certainly choose to sell some stock, but we want that to be a choice.
We currently own shares in 36 companies. We do not invest in mutual funds or exchange-traded funds.
Where do we get our ideas? I subscribe to Morningstar’s DividendInvestor newsletter, a service called F.A.S.T. Graphs and participate in a couple of dividend growth discussion groups.
Are there other ways to invest? Heck yes – and they may well be better suited to many investors or retirees. Over two decades of personal experience with investing, this is the route I have taken, and it seems to fit our personal circumstances. I am not recommending this path or any other particular path to anyone. I am attempting to describe what I do.
It is a fun and so far profitable hobby that ties in well with my past as a research analyst in a whole different field. Oh, and make sure to read the previous blog post with the disclaimers :).
Finally, I have had a number of mentors and teachers along the way. The list would be fairly long and the names would not have meaning to most of you, but if I decide to write more about this area of my life, I am sure I will write about the history of how I got here and the people who were important in this part of my path.