The year 2020 proved that no one is completely safe on many levels. Investors, in particular, felt the burn when the stock market fell faster than ever before. However, none of these things changed the fact that investing in dividend growth stocks remains a great idea for safeguarding your future. This is a long-term play that will ensure you can enjoy some financial security even through a major crisis.
Dividend growth stocks are a source of regular income because the companies that offer them distribute a portion of their earnings to investors. As the company grows, so will your dividends. And if you reinvest them to purchase more shares, your income will also grow even more as they compound over time.
You can buy dividend growth stocks in different industries, from companies like Walmart to Apple to banks and energy corporations. While investing in dividend growth stocks are a great way to build wealth, building your portfolio in this stock can be challenging because it’s not always obvious which investment will pay out best over time.
This article will help you answer some of those questions and point you toward some factors that will help you choose the best dividend growth stocks and what you should do once you have them.
Benefits of Investing in Dividend Growth Stocks
Investing is a good way to both increase and protect your fortune at the same time. But of course, no investing strategy is completely safe and there is often a correlation between risk and return. The stock market crash in March of 2020 was an example of the volatility of investing in the market, especially with stock trading. Many investors panicked and sold their investments, and many of them turned to real estate.
Adding a few high-yielding pieces of property to your portfolio is wise, no arguing that. However, this kind of investment is not perfectly safe either and it typically requires more capital upfront. The only way to get around that large upfront investment is to look at a REIT (real estate investment trust), such as the one offered by DiversyFund.
But, for many investors dividend investing will be a much better choice.
An investment in dividend growth stocks provides you with a regular income stream and a way of capital preservation. Most importantly, it allows you to ensure that you will keep your purchasing power.
It must be said that dividend growth stock is not a source of immediate reward. It can be most tempting to invest in some promising startup that promises to make you a fortune. However, never forget that stellar success is a highly improbable scenario. Therefore, while some tech stocks can help you make money fast if you are very lucky, this success is unlikely to last.
Dividend stocks outperform market stocks all the time in the long-term. And it’s the long-term prognosis that you need to focus on if you want to build wealth. Also, there is no end to dividend growth in sight.
However, there is an even more important advantage of dividend investing. As this year has shown, stock prices can make some truly unpredictable and disastrous turns but sustainable companies continue to grow and pay dividends.
How to Build the Best (and Most Lucrative) Dividend Portfolio
If your dividend portfolio is good and your strategy is solid, you won’t be majorly affected. Even in case some businesses cut their dividend payments, you will have your future security and some guarantees intact.
And a good portfolio means a versatile one.
Therefore, diversification is key to your success as an investor. Also, you need to think beyond enterprises you can invest in locally and consider global as well.
While a U.S. investor should definitely look for the best US dividend stocks they shouldn’t stop there. A diversified portfolio will also consider the best Canadian dividend stocks and those from Europe as well. Do not forget that Asia has some impressive stocks for long-term gain.
Considering a wide variety of dividend growth stocks from different sectors and markets will help insulate your portfolio from major market downturns. Should another crisis strike, some businesses will go under. Unfortunately, even dividend investors aren’t perfectly safe from this. However, by having a diverse portfolio you ensure security as best you can for your investments. It’s important to not put all your eggs in one basket.
Another important thing to remember when building a dividend portfolio is that bigger isn’t always better. This means that you shouldn’t fall for the call of the highest yield. With this investment, it’s all about long-term progress. Therefore, take a look at how each stock has performed over the last decade. If it offers consistent growth and forecasts are good, choose that. High yields can be short-lived so it is best to look for companies that have shown a history of good, steady growth.
Bear in mind that you should always consider the payout ratio when investing in dividend stocks. The case will differ for every company. However, on average, good options are around a 50% ratio. This indicates that the dividend has room to grow and that the company has the funds to keep up payouts. But there are some businesses that can maintain a 90-100% payout ratio and still perform extremely well. You should always consider payout ratio on a case-to-case basis and research the business thoroughly.
Quality always beats quantity in dividend investment and reinvestment. Therefore, focus on finding the best stocks that have proven their performance over time.
To sum up this section, two of the most important things to consider when choosing dividend growth stocks are growth history and diversification of companies and markets. Choose stocks with a strong growth history from a variety of different markets to help protect yourself from market downturns. Payout ratios should also be considered when choosing dividend growth stocks.
Next up, we’ll talk about which industries are the best for dividend growth stocks.
Dividend Growth Stock Portfolio Tips: Which Industries to Choose
The diversity of your portfolio must also account for different industries. Many investors, especially those younger and with less experience, are often tempted to invest in tech companies. Logically, this seems like a good plan because the world is growing more digital by the minute. Tech startups often shoot out fast and their stock grows in value bringing you bigger dividend payouts.
However, you also need to remember that dividend growth investments are a long-term plan. Unfortunately, the majority of tech startups go down just as fast as they get to the top. Therefore, they aren’t necessarily a good strategy for a long-term investment and you shouldn’t invest everything into one or two companies.
Of course, you can allocate some of your budget to invest in promising tech companies and hope one of them becomes the next Apple. However, the main portion of your dividend investment budget should go to stable growing industries.
Banking, healthcare, and energy are the safest bets. Even if the stock there doesn’t bring high yield, you can be sure that these businesses will run for decades into the future. Also, this stock is cheaper compared to successful tech giants. So, beginner investors have a much better chance of getting their foot in the door with less of an investment.
Dividend Reinvesting: Keep the Money Flowing
Once you’ve picked some stocks and gotten started with dividend investing, it’s important to build a plan for your dividends.
In order to make your dividend growth investment strategy most profitable you should develop a reinvestment strategy as well. The easiest way to do this is to set up an automatic dividend reinvestment plan where your dividends are reinvested into the same fund. Your underlying investment will continue to grow and your money will help the business itself to grow.
In the end, everyone wins and in the long-term your shares and yield will increase. This plan will be most beneficial if you are going to stick to these funds for a long while. In the world of dividend investment this means five years or more.
Also note that you might be able to reinvest fractional shares in some dividend stocks as well. However, others might require you to pay some amount directly to buy full shares. Overall, be sure to study the fund’s investment terms or discuss this matter with your broker to develop the best plan.
Bottom Line: Protect Your Future by Dividend Investment
Dividend growth stocks are a great way to build wealth over time. However, it is also important to put some serious thought and strategy into picking your investments so that you include a good smattering of sustainable companies and protect yourself from risk.
The best way to do this is to build a diversified portfolio with a mixture of industries and markets. You should also research the performance of the stock over time and pick those that have shown steady growth. While it’s tempting to pick up-and-coming tech companies, these often shoot up and then fall just as fast. Diversification is the best bet against market downturns.
Additionally, be sure to develop a good reinvestment strategy and automate it to the max. This way, your money will be working to make you even more money and helping to ensure your security in the years to come.
Sebastian is co-blogger at Money Saved is Money Earned. He emigrated from India in his 20's with $15 in his pocket. Despite facing adversity in his early life, Sebastian is an early retired Senior Financial Analyst for the City of Portland. He has owned his home free and clear for 15 years, has had income properties, put three kids through college, and travels to India regularly, all without a six figure income.