My strategy involves buying companies which have a history of consistently increasing their dividend payments going back over as many years as possible. The S&P has several lists which are worth focusing on- Dividend Aristocrats and Dividend Kings. The encouraging thing about the lists is that they show you stocks that have raised their dividends consistently over the past 25+ years. Remember I do not just focus on high-yielding stocks, but Skyy does have some speculative plays(3-4) in her portfolio. A stock which shows you a 10% dividend yield when the average yield out there is 2% is most likely a stock, for which the market is telling you that there is a very high chance that the dividend payment could be cut and your yield would decrease. I would rather buy more of the type of stock that pays me around 2-3% currently, but will increase its dividend payments in the future.
My personal goal is to achieve a significant amount of dividend income to cover the famiy expenses.
Another set of stocks worth focusing on is the Dividend Achievers. This list gives you companies which have raised their dividends over the past 10 years. There are at least 250+ companies in the US currently, so for an investor like me and possibly you, this is a pretty big list of stocks to pick from. However the Dividend Aristocrats(52 stocks) and the Dividend Kings(17 stocks) on the other hand contain stocks that are much more manageable to follow to me at least.
I will try to diversify across sectors, without being too overweight in a certain sector like financials or utilities. I will also look for an average dividend growth of at least 3% (which is the average long-term inflation rate). However, I might consider buying any stock that shows a growing dividend, provided that the company spots an above average yield. Even though the passive dividend income will rise much slower, your money will compound at a higher rate for a long period of time.
I would also consider selling a stock once it starts decreasing dividends; I won’t sell simply because a company whose stock I already own does not raise its dividend, but I might not add any more money into that particular position.
Also my goal is to achieve an above average yield on cost in the future. For example if me or anyone who was born before 1989 had invested $1000 on Altria(MO) you would have bought 24 shares and had a dividend income in 1990 of $35, and achieved a dividend yield of around 3.5%. If you held your stock until 2006, you would have had a dividend income for 2006 of $239 on 72 shares. That would be close to a 24% annual yield. Your 24 shares would have turned into 72 shares worth $6,179 at the end of 2006. If you had reinvested your dividends the $1000 investment in 1989 would have turned into $18,167.
Once again from my previous post and this one, my strategy involves investing in the Dividend Achievers, Aristocrats, and Kings that provide high yields that show consistent increases in dividends over time and the ability to cover those dividends in the future. I hope that this blog will inspire others and to allow them to build their wealth over time with the right mix of great companies.
-Live Long & Prosper