Last month I wrote why I believe exchange-traded funds are great for people who want to start investing, but hardly have any experience at all. Over the past half year the rationale behind ETFs has taught me a lot about the ins and outs of the stock market. The experience of buying shares for my ETF portfolio has also been a tremendous practical learning experience.
Now, however, I feel like switching up my strategy and moving away from relying only on ETFs. While they will continue to form the foundation of my portfolio, I strongly expect to benefit more from a dividend growth investment strategy. Not because the dividend strategy is superior to the broad market approach, but because it fits me better as a person.
That’s not to say that dividend growth investing doesn’t have a lot going for it, of course. Especially for people seeking financial independence and passive monthly income, dividend growth investing provides an excellent investment strategy. If you carefully invest in high value businesses with a great and sustainable operating model, then dividend growth will be your best friend. The math behind the strategy naturally doesn’t lie.
Even though I consider myself to be a rather rational person, hard numbers don’t always convince me. Dividend growth investing fortunately also appeals to my more emotional and more human side.
Here are the three reasons why I am fond of dividend growth investing.
1. I hate uncertainty
I am one of those people that can’t stand uncertain situations, especially when I have no way of reducing or controlling the risk associated with them. Dividend growth investing helps me sleep at night because most of the long-time dividend paying companies have an excellent business model that will be profitable far into the future.
While ETFs provide me the same peace of mind, the fact that dividend growth stocks are unlikely to reduce their dividend payments even when the overall stock market is down 50% like in 2008 is a big plus to me. Even though I am uncertain about the underlying value of the company I’m invested in, I am more or less certain about the minimum amount of dividends that company will pay me.
2. I am impatient
By my very nature I’m an extremely impatient and often visceral person. Whenever I order something online, for example, I can’t wait for the item to arrive at my doorstep. Preferably two minutes later. Instant gratification and long-term investing, however, do not go well together.
Dividend growth stocks provide a happy medium in that a well-diversified dividend growth portfolio provides a rather steady stream of monthly dividend payments and long-term wealth gain. My weird brain considers these dividends some sort of awesome result, cancelling out the impatient itch for an instant wealth boost in the back of my head.
3. I need to monitor my progress
Working towards an end-goal is great, but sometimes you need checkpoints along the way to get there. Because my end-goal of financial independence by 40 years old is rather vague I have already set myself yearly goals, but they’re not enough to keep me from second-guessing the progress on my end-goal.
I believe that by setting interim goals, such as having the dividends cover your monthly groceries or rent, it’s much easier to see the progress of your dividend snowball. As a result, it would be easier for me to stay the course rather than give up on the entire financial freedom endeavour all together.
At first this article was called “Three Reasons Why Dividend Growth Investing is Awesome”, but I decided to change the title because the arguments mentioned above are very personal in nature. Consequently, it’s entirely possible that they don’t apply to some of you and that you consider dividend growth investing a bad fit.
Although I am fond of dividend growth investing, that doesn’t mean I don’t advocate the index method of mutual funds or exchange-traded funds anymore. I still believe index funds are a great way for beginners and even more seasoned investors to enjoy the returns of the stock market.
That’s why I plan to hold on to my ETF shares and quite possibly will continue to add to them on a regular basis. Starting tomorrow, however, I will also invest in high quality dividend paying businesses because of the three reasons mentioned above.
Sometimes it’s important to look at yourself in the mirror to see who you really are and adapt your actions accordingly. You might find that while you fully agree with a certain approach on a conceptual level, it’s probably not the best fit for you on a personal level. That holds especially true for investing.
For me, that was the case with my current plan to reach financial freedom. By changing my method I hope to stay the course and reach my end-goal by the time I’m 40 years old.
Thanks for reading and for your unexpected and overwhelming support so far!
Sounds like you’re a good candidate for a dividend growth investor. 🙂
Best of luck with the strategy and moving over some of your assets to dividend growth stocks. I hope it serves you as well as it’s served me!
And thanks for the mention.
I sure do hope so. You among others are the reason why I looked into dividend growth investing and decided to adopt it myself.
We’ll see how it plays out, but I’m excited to get started and see my dividends grow!
Thank you for the mention NMW!
I also wish you good luck in your investing endeavours! I like the fact that you are focusing on the middle ground and what works for you. If you find a strategy that works for you and can help accomplish your goals, you just stick to it, and let compounding do the heavy lifting!
Dividend Growth Investor
You’re welcome! Your blog provides hours of information, so I’m glad to forward my readers to your little part of the internet.
Dividend growth investing does indeed provide me with a solid middle ground: long-term gains combined with visible short-term results. Every dividend payment hitting my account pushes me forward!
We have a 3 stage plan for all of our investment/money accounts based on tax efficiency/optimization and Canadian dividend paying stocks are at stage 3.
We’re currently in stage 1 and I think it will take a couple of years to get to stage 3.
The plan is: fill all the tax sheltered accounts and place the most tax efficient/optimized investments in those accounts, then Canadian dividend paying stocks in non-tax sheltered accounts because tax laws allow for a generous dividend tax rate and the ability to tax loss harvest.
I have no idea how Canadian taxes work, so this may be a really dumb question: why not start with them now if there is a generous dividend tax rate? You could use the dividends to fuel the tax sheltered accounts.
In other words, why do you have a stage 1, 2 OR 3 approach instead of a stage 1, 2 AND 3 at the same time approach?
Just a thought, but again, I’m unfamiliar with Canadian taxes.
Thanks for reading,
Good luck with the first steps in dividend investing. I’m sure you will like it:D The feeling when you look to your brokerage account and see the first 100 EUR dividend payment roll is is great. And grows faster then you can imagine;
I sure hope so, Geblin! Some of the dividend stocks on my radar have dividend payments next month I believe, so you can definitely expect a post on that.
One thing I’ve been wondering about if you have a mix of ETF’s and stocks – you know how you are supposed to make sure your portfolio is diversified across industries? If you have a combo, how can you be sure it’s appropriately diversified? Treat separately and ensure diversification within each type?
Great question, Debs!
I thought about it too and the easiest solution, as far as I’m concerned, is to treat the ETFs and the invidiual stocks seperately, like you said. My ETFs are for a fact diversified accross all industries and even countries, so I don’t have to worry there.
For individual stocks industry diversification will be a bit more difficult in the beginning because I don’t have enough cash lying around to buy 20+ stocks at once.
Those are good reasons for investing. You can’t go wrong with dividends. Best of luck, I’m sure you’ll do plenty fine.
Thanks for the confidence, Henry! I’ll regularly post updates on my progress and experiences!
Sounds like you should start your journey with dividend growth stocks. Since you already own some ETF’s I think a combination of ETF’s and dividend growth stocks might be good for you. 🙂
I think so too, Tawcan! ETFs are a great investment vehicle, but they’re a bit too passive for me. I hope to counterbalance that with dividend growth stocks.
I love me some dividend growth investing! I’ve more recently gotten into it, as I still hold most of my retirement accounts in index funds, but something about a company that will be presumably paying out ever increasing dividends 20, 30, and 40 years from now just speaks to me (or really, speaks to my desire to have to do nothing but wait to become a wealthy man).
You take the words right out of my mouth! I feel the exact same way. Index funds are great, but I need the hands-on approach to keep me motivated.
I hope some of my future dividend stock reports will prove useful in building your own dividend growth portfolio!
I have recently converted 60% of my portfolio away from ETFs and Index funds into dividend growth stocks. I still have a few ETFs as they provide an easy way to increase my international exposure and I like the ones I currently have because of course they pay dividends as well 🙂
Seems like we’re kind of in the same boat, although I won’t sell of any ETF shares! They provide me the diversification and international exposure my dividend portfolio thusfar lacks.
I’ll check out your portfolio after work!
Thanks for stopping by,
Best of luck on your journey.
Thanks, Mark! Let’s hope the rest of my journey is as kick-ass as the begin, because I’ve had an awesome start!
Dividend growth investing has a very appealing nature but if there is no capital gains in Belgium wouldn’t stocks with no dividends be more productive e.g. Google, Markel etc?
Good question! You’re right that there’s no capital gains tax in Belgium, so it actually makes sense to invest in stocks that don’t pay dividends.
However, I enjoy the feeling of creating a passive income stream more than having a wildly fluctuating portfolio. Furthermore, if I was ever to retire on my portfolio I’d have to start selling non-dividend paying stocks. That’s fine when they are at all-time highs, but really stings in a down-market. Dividend growing stocks maintain their payouts throughout recessions so that you won’t have start selling individual stocks.
Kind of irrational, I know, but it makes me sleep better at night.
What’s your thought on getting dividend-paying versions of your ETFS, or are they that already..?
That way quite easily diversify and get dividends as well.
Abd could there be specific ETFs out there which only track solid dividend-paying companies?? That way you wouldn’t need to buy all individual stocks.
The ETFs I own accumulate rather than distribute dividends because that’s better from a tax perspective in Belgium – no capital gains tax as opposed to a 25% dividend income tax.
The problem with many ETFs distributing dividends, apart from the taxation and that they’d have to be registered in Belgium, is that the dividend payments fluctuate. Most ETFs don’t focus on dividend champions and thus the income they’ll throw off will be rather volatile.
However, there are some ETFs out there that try to track dividend aristocrats. iShares has this fund, for example: http://www.ishares.com/be/individual/nl/products/251787/ishares-euro-dividend-ucits-etf (It contains non-champions too though). Still, when dividend income is concerned I’d rather have a say in the percentage of each holding and sector’s contribution towards my total annual income.
Another reason why I prefer individual stocks is because dividend ETFs distribute only four times every year, which renders the second advantage of dividend growth investing described above void.
I am sorry. I didn’t understand if you re-invest the dividends or you keep and use the cash ?
It doesn’t matter too much where my money comes from – cash is cash, right? Because I’ve never spend more than my salaried paycheck in any given month, I’ve always re-invested my dividend income in more dividend paying stocks. That way you get the double compounding effect: both from more investments and from growing dividends.
do you pay attention also to the GAIN value of your dividend portfolio ? In my opinion is very important. Not just the dividend payments.
I follow the capital gain of my holdings, but it’s not really important to me. Strong dividend payers always show decent capital gains too because the value of the stock often follows dividend increases.
As long as my dividend income remains stable and grows at a decent rate irrespective of the underlying value of my holdings, I’ll be a happy camper.
If i understand , the “ideal” strong dividend payers stocks are those that in the long term increase dividends and show very good capital gains . Am i right ?
Capital gain follows stable dividend growth, so yes!
are you aware that this dividend approach is not rationally the best choice for a 25yo right? Your focus now should be on growing your portfolio as much as possible, and when you want to retire switch to dividend stocks. 2 reasons
1. Dividend stocks typically grow slower than the total market
2. Every dividend payment you loose 25% to taxes, that you could’ve better used to reinvest.
As long as you are putting more money into stocks, than getting out of it, you have to focus on maximizing growth
Investing isn’t just about the numbers for me; I also have to feel good about a certain strategy. DGI fits me better in that regard than index funds – although I remain a strong proponent of indexing!
The market value of dividend stocks might grow at a slower pace, but that doesn’t really bother me since I’m not looking to build wealth, but rather a certain passive income stream. As long as the dividends continue to grow at a decent rate above inflation the underlying value of the investment doesn’t matter.
It’s true that I lose 25% to taxes, but I never let taxes determine my strategy (within reason, of course). Without going into further detail, it’s highly likely that Belgians will be seeing some sort of capital gains tax, thus rendering your point moot. I can’t predict the future, of course.