Buy a stock at ten dollars and sell it the next day for twenty.
That’s the picture most people have in their heads when they hear the word “investing”.
It’s a hundred percent correct.
The difference between the $10 buy price and the $20 sell price?
We call that profit “capital appreciation”.
Just trying to sound sophisticated.
In reality, “capital appreciation” is one type of profit we can derive from investing in a company’s stocks.
We saw this in action on the previous page where if we were to capture the profits from “capital appreciation”, we’d have to sell the stock — along with our life energy.
There’s another type of profit from stock investing called “dividends”.
It is one of those words that sounds like we’ve heard it before somewhere but have no clue as to what it actually means.
But in fact, dividend investing is a method of achieving financial freedom that has stood the test of time.
To put it into numbers, 84% of the S&P 500’s total return over the past fifty years can be attributed to reinvested dividends.
What Is A Dividend?
Dividends are payments made by corporations as a way to share their profits with shareholders — AKA part-owners of the corporations.
When a company decides to pay a dividend, each share of stock that the investor owns entitles him to the set dividend amount in cash.
Dividends are usually distributed to shareholders on a quarterly basis, i.e every 3 months.
A company is not obligated by law to pay dividends.
Nor is it obligated to pay any specific amounts.
Nor is it obligated to continue paying dividends even if it has done so previously.
Alphabet Inc. (the company that owns Google), for example, has never paid any dividends in its existence.
On the other hand, 3M corporation (the company that invented Post-its) has been paying dividends consecutively for the past 100 years.
The Walt Disney Company, in contrast, has recently suspended its quarterly dividend after a 40-year streak of growing dividends.
So a dividend is not too different from a quarterly paycheck that you get from a nine-to-five day job.
But instead of sitting at the office for 8 hours 5 days a week, the only thing you’d need to do is to own the stock.
Of course, just as you might get laid off, the company might cut off your dividends.
Though unlike the impossibility of working on 100 day jobs for 100 paychecks, it is perfectly possible to own 100 dividend stocks for 100 quarterly dividend streams.
Losing one of your dividend streams would have far less of an impact on your quality of life than it would for you to lose your one and only day job.
So owning a portfolio of high quality dividend companies is like having a job that you can never get fired from.
What Is A Dividend Company?
A dividend company is a company that has been paying out dividends consistently.
What do you call a company that has been paying out consistently growing dividends consistently?
A dividend growth company.
Doesn’t that sound like pay raises that you can expect to increase ever more year after year?
In addition to having a job that you can’t get fired from?
And depending on how long the company has been growing its dividends consecutively, it can be categorized as one of the following:
- Dividend Champion: ≥10 years of consecutive dividend growth.
- Dividend Aristocrat: ≥25 years of consecutive dividend growth.
- Dividend King: ≥50 years of consecutive dividend growth.
Once a company builds up a track record of dividend increases, continuing a dividend paycheck to shareholders is almost not a matter of choice.
Sure, nobody is going to jail if a dividend is cut.
(Somebody probably should. **Hint hint** Disney.)
But a dividend paycheck is factored into the companies Key Performance Indices, business projections, and CEO appraisals.
A dividend cut is a REAL risk.
It is also a risk that can be realistically controlled for.
What Is A Dividend Growth Company, Really?
I’m not being annoying here.
What I’m trying to get at is:
What kind of company pays out a consistently growing dividend?
- A company that has a consistently growing revenue.
- A company that has a consistently low operating cost.
- A company that has a consistently growing net income.
- A company that has a consistently growing free cash flow.
- A company that has a consistently strong profitability.
- A company that has a consistently low level of debt.
- A company that has a consistently wide economic moat.
Because a company cannot possibly afford to pay a dividend if it doesn’t possess all the above.
Let alone paying a dividend quarter after quarter for decades and counting.
Flipping to the other side of the coin, if a company possesses all the above, doesn’t it make it a good business?
Does that sound familiar to anyone?
The 4 Principles Of Business?
- Earn more revenue
- Push costs low
- Convert that difference into profits
- Capture those profits as a cash flow
I told you that dividend investing can take care of all of those things.
So allow me to point out the obvious:
Dividend growth companies are high quality businesses that are worth investing your hard-earned money into.
Yes, there are great businesses that do not pay a dividend.
But why even bother?
Dividend investing used to be pretty simple.
What I mean by this is that you could open a brokerage account, deposit a hundred dollars, dice on any of the companies that pay a dividend, and get some healthy returns.
If you knew how to buy a dividend stock within your tax-free retirement account, you could get some REALLY good returns.
It’s why so many people still recommend using up the quota of your Roth IRA account to the maximal cap before investing with your taxable brokerage accounts.
In fact, you didn’t have to pick a good stock at all.
You just had to pick one.
Because the rising tide lifted all boats with the longest bull run in the stock market since the 2008 financial crisis.
It was nice in the sense that you could make money by being average.
I think that’s what drew so many people to dividend investing.
They’d see others do average things and make money so they figured if that’s the most they had to do — then why not do it?
But things have changed and it’s important to understand why.
Some people will moan and say dividend investing is harder now, but it really isn’t.
In fact, depending on how you look at it, you might say it’s easier because everyone is still trying to be average.
All you have to do is be above average with the right company and you have something special on your hands.
(Special note: please notice that I said “the right company” because this plays a huge role in things later.)
You should have these remembered by now:
- Earn more revenue
- Push costs low
- Convert that difference into profits
- Capture those profits as a cash flow
And that’s where we begin our dividend investment journey.
The people who succeed at dividend investing understand that dividend investing is much more than a line of code on your Robinhood app showing the company name, the ticker symbol, the current price, and by what percentage the price has risen in the last trading session.
To those successful dividend investors, owning a dividend growth portfolio means owning a business.
Literally.
They don’t go to Robinhood, tap on the first stock ticker they see on the top stock gainer that day and think:
“Wow, this is a stock. So cool. I’m going to buy these random alphabets and they are going to blow up in value soon for some random reasons.”
They go to Robinhood, tap on a stock that they’ve researched and tracked and evaluated, and think:
“This company better come up with the profits as it did in the past 10 years and give me my cut of the share. Because if it doesn’t then I’m gone in 3 seconds.”
So my question for you is:
What does your dividend growth portfolio mean to you?
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