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Wed. Nov. 10, 2010

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 the same people that complain about taking a beating in the market, are the same ones who will ridicule those 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:

Current Price Yrs of
Company Yield Discount Growth
Weyco Group (WEYS) 2.53% 1.5% 29
Kimberly-Clark (KMB) 4.20% 1.7% 38
Meridian (VIVO) 3.18% 7.7% 19
Abbott Labs (ABT) 3.41% 9.0% 38
Colgate (CL) 2.62% 15.4% 47
Cincinnati Fin. (CINF) 5.23% 16.4% 50
Clorox Company (CLX) 3.49% 20.3% 35
Southside Banc. (SBSI) 4.22% 35.4% 12

Starting in my 40′s, I will enjoy substantial investing success. However, if I knew in my 20′s or 30′s what I know now about dividend growth stocks, I would likely be retired now.  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 KMB, ABT, CL, CINF, CLX. See a list of all my income holdings here.

Related Posts
- 10 Dividend Stocks With Above Target Returns
- The 2010 Dividend Aristocrats
- Protecting Your Dollars With Foreign Currency
- 10 Stocks With 100+ Years of Dividend Payments
- Increasing Dividend Yield Part II: REITs

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4 Responses to “If Only I Had Known About These Dividend Stocks… *”

  1. Barry says:

    As someone in their mid-20′s, I hope that I can prove your thesis and be retired (or at least financially secure) by my mid-40s. I feel lucky I got serious about investing during a major downturn when a return to dividend investing became popular, and that I found all these great blogs on the div-network to educate me. Good luck

  2. As someone of modest roots who did retire in their 40′s, I can say, thinking one-sided like you is not wise, although I do think it is a wise strategy now and also wise as part of a total investment strategy which involves being open-minded.

    There have been various times when all kinds of conservative long term investments which return income have been remarkable. Long term CDs and Treasuries when interest rates were 15%+ in the early 80′s, rental real estate in the mid 90′s, etc, etc.

    Mathematical formulas are great, but randomness (also mathematical – indeterminate probabilities – infinite) is more common than most think. So, it is best not to have some rigid investment strategy. As Yogi Berra once said: “The future ain’t what it used to be.”

  3. Bob says:

    It would be encouraging to think this is the case but you will find that once you have taken the taxation of regular dividends into account you will be worse off. Of course, if you have a tax exempt account and DRIP then this is not the case.

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