“Age doesn’t retire, your cash flow does.”
Finally a retirement article in the mainstream media that gets it. This quote is from an article I read on the Fox Business site the other day (link here) that explains how while a savings goal is important for retirement, you also need to figure out a way to produce reliable cash flow from those savings so as not to run out in retirement. How much passive income (cash flow) your investments produces really does determine when you are able to retire.
There are many ways to achieve reliable cash flow to pay for your living expenses and while the article doesn’t really get into any specific strategies, I would like to talk about one today.
Dividend growth investing.
So what is dividend growth investing? D.G.I. as it is commonly called is investing in blue chip companies that have long track records of paying out part of their earnings in the form of dividends to their shareholders. The best of these also steadily increase the amount of the dividend each year, often at paces above the rate of inflation.
Creating a reliable stream of dividend income by accumulating shares of stock in some of America’a greatest companies that also give you annual raises above the rate of inflation is how I plan on being able to retire and hopefully be financially independent before I’m 40. Companies that fit this profile include Coca-Cola, Chevron, Procter and Gamble, General Mills, Wal-Mart, and Johnson & Johnson.
Your investments grow in two ways when investing in dividend growth stocks. First like other stocks you enjoy rising share prices as companies grow and when the overall market does well. Second you get dividends deposited into your brokerage account every 3 months (or monthly for some!). Unlike the first type of gain which you can only actually use when you sell, the dividends you receive do not require you to sell anything. You are simply being paid to own the stock and be a part-owner of these companies.
So should only retired people invest in dividend growth stocks?
Not at all! Personally I believe it is a great strategy for anyone who is investing, whether that be somebody already retired looking for dependable cash flow in retirement, those in the work force looking to pack away for retirement or another long-term saving goal, or millennials like myself just starting out.
So what are the downsides to dividend growth investing?
Like any investment strategy investing in dividend growth stocks can have some downsides. If you are investing for total return, that is growing your investment total value as much as possible, you are not really focused on how much income your investments are producing for you. With dividend growth investing, the opposite is true. While total value is a nice way to measure your progress, I do it every month in my Balance Sheet Updates, the important metric is how much income you are making from dividends. When starting out, it takes a long time to build up a portfolio that creates enough dividend income.
For example if you buy stocks such as the aforementioned Coke, Chevron, P&G, General Mills, Wal-Mart, and J&J you are going to end up with a portfolio that yields around 3% for your initial yield on cost (dividend yield you will receive based on purchase price, as you get dividend raises, your yield on cost grows). This means for every $1000 you have in your portfolio you’re only getting 30 bucks back in dividends. Blah. If your only investing a hundred bucks or less like I was when I was first starting out, it seems like it will take forever to get to a point where your dividend income can cover all of your day to day expenses.
Ok, I’m getting a little off track here, but my main point is that the biggest downside to dividend growth investing is being able to weather through the days of small dividend checks, avoid getting discouraged, and staying on track with your strategy. That means no going and chasing the latest hot stock (Facebook anyone?) and abandoning your plan.
Dividend growth investing takes a long time before you start to see meaningful results but once you do, it becomes clear how this type of investing will allow you to be able to earn a reliable stream of income when you retire. As the article linked above explains, it’s all about the cash flow!
Full Disclosure: I am long Coca-Cola (KO), Chevron (CVX), and Wal-Mart (WMT). This post is simply my own opinions on investing and should not be taken as professional financial advice. Only you are responsible for your investing. Good luck and please share your thoughts below with a comment. Do you practice D.G.I. and how do you like it?