Investing in dividend producing stocks provides a constant and regular stream of income over a sustained period of time. These dividends will in turn produce a constant stream of income which provides security and independence for the individual investor. For me, this is the true purpose of investing.
Companies usually declare their dividends quarterly during their quarterly earnings announcements and pay their dividends either on a quarterly or monthly basis depending on the company’s policies and the wishes of the Board of Directors. Reviewing the company’s earnings announcement will allow the investor to determine if the company’s sales and earnings are increasing and whether the amount of earnings are greater than the dividend distributed (obviously an important item to notice). This payout ratio should be calculated and compared to earlier periods. All of this is extremely important because a company that is increasing their sales and earnings over time will eventually increase their dividend if their payout ratio remains constant. This is exactly the kind of company that I am looking for when I do my research.
I’m constantly looking for a company that is constantly and consistently increasing sales, earnings and dividends over several years. In fact, the more years of increasing dividends the better. While I’m not aware of any lists of companies that have consistently increased their sales and earnings over time, there are lists of companies that have increased their dividends over time. These lists are labeled the Dividend Contenders, the Dividend Aristocrats, and the Dividend Kings. They can all be easily found using any of the usual search engines. I have included a button for the Dividend Aristocrats that can be found in the header above.
Dividend Contenders are companies that have not only consistently paid dividends for at least 10 years but have increased those dividends each year during that same period. Dividend Aristocrats are companies that have done the same for at least 25 years, and Dividend Kings are companies that have done this for at least 50 years. They’re three great lists but there are obviously fewer companies on the Dividend Kings list than the Dividend Contenders List. Personally I prefer the Dividend Aristocrats List when researching equities. Since these lists demonstrate a sustainable dividend policy, my main concern when researching these stocks is to discern a consistent demonstration of increased sales and earnings and a consistent payout ratio. I understand that sales and earnings are often affected by macro economic and seasonal factors so I look for increased sales and earnings year over year rather than quarter over quarter. I believe it’s a more reliable comparison.
Conservative companies with an increasing amount of sales and earnings will increase their dividends over time for several reasons. One reason is that management and employees are typically equity owners in the company and the dividend financially helps these individuals. Another reason is that it benefits unaffiliated shareholders and also keeps them financially happy. Another reason is that dividends support the price of the stock because as the stock falls the yield increases and brings in more buyers of the stock. This helps support the price of the stock by affecting the supply and demand ratio. Each of these things are good for a stock as well as the company itself.
As an individual investor of dividend growth companies, I look for companies that will not only pay a sustainable dividend but a dividend that will increase annually over time to ensure that my buying power is maintained in the future. It is this sustainability into the future that will provide a lifestyle with a level of security and independence that only the power of an independent source of income can provide. It is the freedom that only financial freedom can provide.
When determining this cost of financial independence, it’s necessary to first determine an individual’s cost of living or cost of lifestyle. Security and independence can come rather quickly if your lifestyle is simple. It can take quite a bit longer if your lifestyle is extravagant. It’s each individual investor’s choice but it’s nice to know that independence and security is possible at all levels. When individual income is balanced against individual costs, security and independence is obtained and freedom begins.
Since the average income of a family of four was $50,054 in the United States in 2012, that seems to be a reasonable place to start. Luckily that amount can be easily obtained by simply having a portfolio of companies worth $1.25M that pay an average of 4% in dividends. If you have a portfolio of companies that pay an average of 3% in dividends you’ll need a portfolio worth $1.66M. While that may seem overwhelming, the requirement to produce $50,054 may be somewhat misleading. If an investor has alternative streams of income like social security benefits or a company sponsored retirement. It may also quite realistic to learn that if an entire family of four can live on this amount, then maybe a retired couple can live on much less.
Good Luck and Good Trading.