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FOR THE PAST 20 YEARS, I’ve bought dividend-paying stocks and then reinvested my dividends. The big appeal: I increase my wealth with minimal effort.
Starting as a dividend investor used to be tricky, but it’s now much simpler. Many discount brokerage firms have no minimum to open an account and no longer charge stock commissions. You can also purchase shares through the dividend reinvestment plans offered by the transfer agents for many companies. These plans allow shareholders to reinvest their dividends and also purchase shares in amounts as little as $50 or $100.
Indeed, when I buy dividend stocks, I usually set them to “dividend reinvestment.” That means I don’t get my dividends in cash, but instead use them to buy additional shares. That way my share count—and the dividends I receive—increase automatically.
Of course, there are thousands of companies you could potentially invest in. Which should you choose? First, I avoid companies that don’t pay dividends. Second, for those that do, I look at their track record. Did they cut or eliminate dividends when the going got tough? How long have they been paying dividends? Do they have a history of increasing dividends over time?
In addition, I avoid companies that are in the news a lot. I prefer companies that are almost boring, that have been around a while—companies that are likely to have staying power. We’ve all seen how technology has replaced prior methods of doing things, and we know that’ll continue. It just isn’t easy to know what those changes will be. Financial history is full of once-successful companies that have since ceased to exist. How can investors protect yourself?
I know my choices won’t be perfect, which is why I buy shares in different companies in different industries. Some companies will fail or falter, even though at one time they were seen as very strong—companies such as Kodak, Sears and General Electric. But over the long term, my investments in those companies that thrive will more than make up for those that don’t.
Today, I own shares in stalwarts such as Johnson & Johnson, Colgate-Palmolive and Procter & Gamble, and some not-so-well-known names like RPM and Emerson Electric. No, I’m not recommending you buy these particular stocks—they’re just five of the 60 stocks I own. Among those 60, most I chose to buy, but a few of my holdings were the result of spinoffs or acquisitions by other companies.
Instead of buying individual stocks, you could purchase funds such as iShares Core High Dividend ETF (symbol: HDV) and Vanguard High Dividend Yield ETF (VYM). But I prefer individual stocks because I get to choose the companies myself.
Intrigued? To succeed at dividend investing, you need just three things. First, you need some initial capital. Second, you need to identify the companies you want to own and decide what to do with your dividends. Do you want income now or do you want to let the dividends buy more shares?
The third thing you need is time. Your income from a diversified collection of dividend-paying stocks should grow over time—and more time means more growth. The earlier you start, the more time you’ll have not just for your companies to raise their dividends, but for you to buy more shares by reinvesting dividends and by investing new savings.
That’s it. It isn’t magic. Getting started is the hardest step. But once you’ve gotten over that hurdle, things should just grow and grow.
Joe Springer is retired and lives in California. He likes oatmeal, gardening, taking a morning walk and laughing at his own jokes. Joe is the author of the blog Smile If You Dare, where he tackles money, retirement and other topics.
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Although buying dividend paying stocks has been my strategy for years and years I’m not sure it makes sense to limit one’s investing choices solely to these companies. This may be particularly true given the rise in popularity of stock buybacks.
However, I like the site ‘simply safe dividends’ for info own dividend paying stocks.
Great article and one more reason to hold these dividend stocks is their stability. I hold about the same amount of individual stocks as well and they are the “aristocrats” also. They have been much less volitile than the indexes and help me SWAN. Some of you may have read Ryan Krueger, he is another proponent of dividend stocks and if you are retired and can get your portfolio yield >4% then the 4% rule works – mine is very close now and I constantly try to improve. Read this great article from Ryan.
https://www.freedomdaysolutions.com/post/whoa-what-if-there-isn-t-a-safe-withdrawal-rate
There is no reason to believe the 4% rule will work in the future, and especially so when using only dividend stocks, instead of a more broadly diversified portfolio. Even Bill Bengen doesn’t use the 4% rule that he invented.
I like companies that pay steady dividends. It usually shows that they are well run and can compete in the marketplace.(You can usually see the poor performers who hide behind dividends.) One can get more “pop” with growth stocks, but you’d better know what you are buying. You still need to diversify, which is what funds offer. The downside of having a dividend-paying portfolio (outside of an retirement account) is that you will have higher taxes each year, directly and through those insidious enhancers, like the Medicare MAGI/IRMAA premium add-on, and some states’ phaseouts of Social Security tax exemptions. Still, I think you sleep better at night.
Good article, Joe. Thank you for taking the time to write it. Compounding your portfolio with dividend reinvestment is a great strategy and I’m sure most Humble Dollar readers agree.
You state that you avoid mutual funds because you prefer picking stocks yourself. That means you spend a fair amount of time doing your homework. Not only do you research companies so you can choose the best ones for investment, but you also have to spend time monitoring the companies in your portfolio to make sure they are not facing potential headwinds.
Do you feel that maintaining a portfolio of 60 stocks is something you can continue to do as you age? Do you foresee a time when you might invest in dividend-paying mutual funds so they can do the heavy lifting?
May I suggest Vanguard Dividend Growth- who’s goal is purchase holdings that can grow their cash distributions in the coming years, or Vanguard Dividend Appreciation- who’s goal is purchase holding that have increased their payouts consistently for at least the past 10 years, screens out less profitable companies, and those with deteriorating fundamentals? These funds will spread your risk, without the hours of research, the hoping you got it right.