Monday, October 31, 2016

If Only I Had Known About These Dividend Stocks...

At one time or another, we all have thought, 'If only knew this when I was younger.' I purchased my first dividend stock for income in 2003. Like many newly converted income investors, I was chasing yield. I quickly built a portfolio consisting of Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs) and high yield, high risk stocks. My portfolio’s yield was consistently in the low to mid-teens. Eventually, after some unnecessary losses, I learned there was a better way to invest in dividend stocks. Here is what I learned...

Dividend Investing is About Future Yield, Not Current Yield

I was fortunate enough to accidentally buy some good dividend stocks and hold them long enough to figure out the "secret" of dividend investing. It is not necessarily starting with a high-yield investment, but ending up with a high-yield investment. This usually occurs by buying investments with a moderate yield, a history of growing dividends and letting time do its job.

Too often we take a short-term approach, to our long-term detriment. There is a reason we don't see infomercials selling dividend growth investment strategies. For those looking to get rich now, a disciplined approach to investing that focuses on the long-term simply isn't appealing.

Successful Dividend Investing is About Substance, Not Style

In my aggressive growth investing years, I equated dividend investing with old folks and the inept. That was simply not my style. Time and experience have taught me there are no style points awarded in building a winning investment portfolio. In the end the long-term performance (substance) of your portfolio is all that ultimately matters, not how you got there.

I find it interesting that many of the same people that complain about taking a beating in the market, are the same ones who will ridicule those of us that follow a dividend growth strategy. For me, I enjoy having a growing income and portfolio, while not having to follow the market's every move.

You Can't Beat the Herd, by Following the Herd

Through the years I have settled down quite a bit. Using well-defined investment allocations, I have set boundaries and guidelines to ensure I don't over expose my portfolio to undue risk and I employ a meticulous process when selecting investments.

Let the talking heads start a stampede to buy a stock after it has seen a significant run up. For me, I prefer to take a contrarian approach and buy stocks when they are cheaper and their yields are higher. My focus is on quality dividend growth stocks with a long record of consecutive dividend increases, such as:

Microsoft (MSFT), the world's largest software company, develops PC software, including the Windows operating system and the Office application suite. The company has paid a cash dividend to shareholders every year since 2003 and has increased its dividend payments for 14 consecutive years. Yield: 2.6%

Abbott Laboratories (ABT) is a diversified health care products company that is now focused on nutritionals, diagnostics, generic drugs, and medical devices, following the spinoff of its R&D-based prescription pharmaceuticals business. The company has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 44 consecutive years. Yield: 2.6%

3M Co. (MMM) provides enhanced product functionality in electronics, health care, industrial, consumer, office, telecommunications, safety & security and other markets via coatings, sealants, adhesives and other chemical additives. The company has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 58 consecutive years. Yield: 2.6%

PepsiCo, Inc. (PEP) is a major international producer of branded beverage and snack food products. The company has paid a cash dividend to shareholders every year since 1952 and has increased its dividend payments for 44 consecutive years. Yield: 2.8%

Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer products industries. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 54 consecutive years. Yield: 2.8%

Genuine Parts Co. (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products. The company has paid a cash dividend to shareholders every year since 1948 and has increased its dividend payments for 60 consecutive years. Yield: 2.9%

Lockheed Martin Corp. (LMT), the world's largest military weapons manufacturer, is also a significant supplier to NASA and other non-defense government agencies. LMT receives about 93% of its revenues from global defense sales. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 54 consecutive years. Yield: 3.1%

Cracker Barrel (CBRL) Old Country Store develops and operates the Cracker Barrel Old Country Store restaurant and retail concept in the United States. The company has paid a cash dividend to shareholders every year since 1972 and has increased its dividend payments for 14 consecutive years. Yield: 3.4%

Cisco Systems, Inc. (CSCO) offers a complete line of routers and switching products that connect and manage communications among local and wide area computer networks employing a variety of protocols. The company has paid a cash dividend to shareholders every year since 2011 and has increased its dividend payments for 7 consecutive years. Yield: 3.4%

Abbvie Inc. (ABBV) is a global research-based pharmaceuticals business that emerged as a separate entity following its spin-off from Abbott Laboratories at the start of 2013. AbbVie's key drug is Humira for rheumatoid arthritis. The company has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 44 consecutive years. Yield: 3.8%

Having starting in my 40's, I will enjoy a substantial income when I finally retire. However, if I knew in my 20's or 30's what I know now about dividend growth stocks, I would been retired for many years. The compounding power of growing dividends is tremendous. Start early, at some point time will change from your friend to your enemy.

Full Disclosure: Long MSFT, MMM, PEP, JNJ, LMT, GPC, CBRL, CSCO, ABBV. See a list of all my Dividend Growth Portfolio holdings here.
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