Investing In Dividend Stocks Overview
Dividend stocks offer investors and individuals an excellent opportunity to build a long-term portfolio and income stream. While the process is a multi-year, maybe even multi-decade, strategy, it can be very fruitful and very lucrative to begin investing in dividend stocks now. If you’re a young person, the opportunity to build a portfolio of high yielding, cash flowing securities is one you do not want to pass up.
The goal of this website is to dive deep into dividend stock investing. I have been an investor for about ten years, and after many trials and errors, successes and failures, I have come to the hard conclusion that investing in dividend stocks is absolutely the best strategy for individual investors.
Cash Flow Over Trading
The problem with most investors is that they don’t know how to invest. Most individuals approach investing like a trader rather than someone looking to invest in a company that will yield a regular and increasing return over time. If you’re focus isn’t on dividends, it means your focus is on capital appreciation. While this isn’t a bad thing, it’s much harder to earn a high return via capital appreciation versus regular cash flow payments.
To earn a return on a non-dividend paying stock, you have to successfully trade it by navigating two successful transactions. You have to buy the stock, and then sell the stock. Whether you make money or not is determined by the levels of both transactions meaning you two successful transactions are required to not lose money. This resembles trading rather than investing.
The successful dividend investor approaches investing in a stock like someone looking to take a stake in a business. Would you want to own a piece of this business? What kind of return would you expect and demand on the cash that you are outlaying to buy that chunk of the business? This is what you should be considering each time you look at a stock to purchase.
Long Term Focus
Unfortunately, in the investing world, a long term perspective is often times an excuse for poor performance. Don’t worry about your crappy portfolio that is losing money, after all, you’re supposed to have a long term focus! Excuse me?
While a long term perspective in investing has sort of gotten a bad reputation, it is still a wise point of view for a few reasons:
- A long term focus enables the power of compounding returns. If you’re reinvesting dividends (which is a great strategy), you can build up some massive positions in excellent companies over time.
- A long term focus promotes fundamental analysis of companies rather than technical analysis which drives short term trades. Markets can get out of whack due to a number of reasons, but over time, a company’s real value should drive its stock price. This is something we will use to our advantage.
- Dividend growth is a major aspect of our strategy. Companies that raise their dividend payouts each year over many years can result in some outsized returns on our invested capital.
- A long term focus enables the investor to exercise patience in waiting for above average buying opportunities. Blind investing regardless of what the market is doing is not what we promote.
What We Are Looking For
Since we’re looking for long term, above average returns, there is a definite set of criteria by which we invest:
- Macro Picture - We do not invest in companies that are swimming against the grain of the macro picture. Whether it is an outdated business model (newspapers) or a type of business that we think will struggle based on the macro economic environment (luxury consumer goods), these are not the companies we are looking for. Furthermore, we want long term sustainable business models which typically eliminates many tech companies which is an impossible industry to predict more than a few years out (these companies rarely often dividends anyways). The companies we target should perform well in the macro economic picture we anticipate in the coming years and decades.
- Competitive Advantage - In addition to a favorable situation with the macro economic environment, the companies should have a definite competitive advantage within their own industry. Are they leaders in their field? Examples: Microsoft dominates software, Philip Morris Int’l dominates cigarettes, Wal-Mart dominates retail, etc.
- Growth Strategy - Does the company have a viable growth strategy? Some are better than others, and if the growth strategy is a concern, we will look for even lower/more aggressive entry points.
- Management - The company’s management should have a track record of returning value to shareholders. We definitely prefer dividends to buybacks, but understand in today’s corporate world, buybacks are very common. A long record of increasing dividend payouts is a must.
Conclusion
To sum up our strategy, our goal is to build massive portfolios of quality companies that pay ever increasing dividends. We will attempt to allocate additional capital at opportune times as the market presents them to accumulate more shares of the companies we target. We will reinvest the dividends to compound our return over time. A few decades from now, we should have, at a minimum, a multi-million dollar portfolio of the world’s best companies that pay out tens of thousands of dollars a month in dividends. Is this your goal?