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!