Being financial independent means you are able to generate enough passive income to cover your expenses. Typically, we tend to view this milestone as the day we retire after working 40 plus years. If you genuinely enjoy your career, you’ll have no problem with this traditional arrangement, however, for a good portion of the population this will seem like more a prison sentence.
If you’re part of the latter group the question then becomes “how do I accelerate my passive income growth without taking on too much risk?” The answer for me has been a dividend growth investing strategy.
The basic idea behind a dividend growth strategy is buying companies that have consistently increased their dividends year over year and holding on to them indefinitely. If it sounds boring and horribly unsexy, that’s because it is, BUT IT WORKS.
Time is on your side
A longer buy and hold investment time horizon is a huge advantage for two main reasons:
- More time allows for companies you hold to grow their dividends
- Purchasing stocks consistently over an extended period of time reduces the risk of buying at a market peak
The beauty of this buy and hold strategy is it allows for me to ignore the market drama. Take a look at most business headlines in the paper and it’s no different than most of the other headlines; doom and gloom. Knowing that I don’t plan on selling any of my investments permits me to shrug off any dips in the investments I hold because I’m more interested in the dividends/payouts they will consistently provide.
It took me approximately 2 years to learn and decide on an investment strategy that suited my personality. Before this time my knowledge of investing was similar to most – head in the sand, let someone else manage it and hope for the best. While this approach can work out well if you’re lucky enough to have a solid financial advisor, it can also end up costing you big time.
In my first year of dividend growth investing I generated a modest $400. My second year saw a 200% increase over my first year. Now in my third year I’m hoping for another 100% increase over last year.
Most of my dividend increases are being fueled by my current savings contributions. Seeing these year over year dividend increases are great motivation for me to continue to aggressively save.
My Personal Portfolio
Below is a list of the stocks I currently own and their respective weighting:
The above stocks are considered blue chip, in that they’ve been around for a while and have proven track records. The other thing they have in common is a consistent history of dividend increases year over year. For example, take Canadian National Railway, which I’ve owned since I began investing. In 2010 you could have purchased one share of this stock for just a bit over $15 and would have been paid an annual dividend of 0.54. Fast forward to today and that same share would be paying you $1.25 in annual dividends of a return on cost of around 8%.
A couple things come to mind when I look over this list that concern me a bit. First, I’m too heavy for my liking on CNR at 16%. My plan is to reduce this weighting to 10% by the end of this year by increasing my exposure to the other stocks in my portfolio.
Secondly, financial stocks make up over 20% of my overall portfolio. I’m somewhat reassured by the strong dividend histories of the banks I hold as well as my indifference to market volatility.
My portfolio is made up entirely of Canadian stocks which some may consider risky, however, a great deal of these companies operate in foreign markets. The risk is that if the Canadian economy tanked my portfolio would take a serious blow versus if I had some exposure to stocks in the US or other countries. My goal in choosing stocks is to select dividend growers, not necessarily the overall Canadian or global markets. While some may see this as a risk, it’s one that I’m comfortable in taking.
I’m planning to keep my number of stocks owned under twenty. This allows me some decent diversification without growing the list to an unmanageable number. I review the performance of these stocks twice a year to make sure they’re still increasing their dividends and not in jeopardy of reducing payouts.
Dividend growth investing may not be for everyone. It requires you to ignore the market and stick to your plan, especially during times of poor market performance. However, with a long time horizon and consistent approach it’s a strategy that’s proven to yield positive results.