I’ve been a steadfast dividend growth investor since the early part of 2010.
It was after taking a look at every potential long-term investment strategy that led me to settling on dividend growth investing as the strategy that, I believed, would take me to the “promised land” of financial independence and early retirement.
Things worked out really well.
My FIRE Fund, which is the result of a lot of saving and dividend growth investing, now generates the five-figure and growing passive dividend income I need to cover my basic bills in life, rendering me financially independent.
Hindsight is great, but there were a number of key reasons that allowed me to make the choice to focus on dividend growth investing from 2010 onward as I built out my wealth and passive income on my way to FIRE.
Now, there are plenty of different ways to go about building wealth, passive income, and freedom in life. Each individual should pick a strategy that works best for them.
But I want to share the reasons why I believe dividend growth investing is the best long-term investment strategy of all for those who want to FIRE at a relatively young age.
This post was partially inspired by the recent passing of David Fish, who steadfastly provided incredible resources for dividend growth investors (including me) for years. I’m going to honor him and the strategy he championed by sharing some valuable and inspirational thoughts on how it’s changed my life (and how it might be able to change yours, too).
Predictable Dividends Form An Excellent Foundation For An Independent Life
My FIRE is underpinned by the dividend income my portfolio generates on my behalf.
As of the writing of this article, the dividends I’m expecting to collect over the next 12 months adds up to over $12,500.
While I collect some other passive income, like royalties from my best-selling book on how to become financially independent, the dividends form the vast majority of my ability to live a life independent of financial concerns and/or needing to have a job/source of active income.
Growing dividends are an excellent foundation for an independent life because of their predictability.
They’re predictable because decades of proven dividend payments sets you up for an unlikely failure to get paid.
Procter & Gamble Co. (PG), for instance, has paid a dividend every year since 1891, and they’ve been increasing their dividend for 62 consecutive years. Billions of people consuming Procter & Gamble Co’s various products aren’t going to stop doing that anytime soon, nor is Procter & Gamble likely to stop paying and increasing its dividend.
An object in motion stays in motion. We know that from our elementary school science class. Well, a dividend in motion tends to stay in motion, too. The forward momentum that is many decades of growing dividend payments means it’s unlikely that motion will discontinue.
You want predictability when it comes to your passive income source, because bills will surely continue to come your way.
Rent is predictable. You’re predictably going to eat, transport yourself around, and do whatever else it is you do in your life. Spending money is a reliable outcome in life.
Well, you want that kind of predictability and reliability when it comes to your passive income, too.
And this predictability is great when you’re marching toward financial independence, because you can actually see the growing dividend income line up against your expenses. You can see freedom inching closer, day by day. It’s like watching your ship come in.
This makes it easy to plot your “crossover point” – the point in time in which your passive income will exceed your expenses, rendering you financially free. You can see that foundation being poured like you’d see a foundation poured for a skyscraper. And since the sky is the limit with this strategy and the FIRE lifestyle, it’s an apt analogy.
It’s About As Passive As It Gets
Guess what I have to do to collect a dividend?
Zero. Zip. Zilch. Nada.
No 1-800 number to call. No letter to write. Nobody to bother, and nobody to bother me.
I wake up, my expected dividends are in my account, and I go about my day. This process plays out, on average, every day of the year.
Once you actually buy a dividend growth stock, there’s basically no ongoing “maintenance” at all.
This is a different dynamic compared to most other strategies that are designed to build wealth and income, where at least some of your resources (time, energy, presence, etc.) will be required on at least a semi-regular basis.
Sure, you should keep a loose eye on your investments, but high-quality businesses (which are the type you should be investing in for the long haul) don’t need Jason Fieber (or you) to babysit them. Likewise, I don’t need to worry about PepsiCo, Inc. (PEP) bothering me if/when the proverbial toilet leak develops (or some such other problem arises).
It’s very tough to get more passive than collecting growing dividends, but it’s very easy to get less passive.
It Forces You To Focus On High-Quality Businesses For The Long Haul
A lengthy track record of dividend raises is in and of itself a fairly solid initial litmus test of business quality, as it’s nigh impossible to pay out increasing dividends for many years, or decades, on end while simultaneously running a terrible business that doesn’t turn a profit. Those two events are practically mutually exclusive.
You can turn to your capital structure (debt and/or equity) for a bit to bridge a temporary gap in funding, but that can’t and won’t last indefinitely, especially if the gap is sizable (which would almost certainly be the case if you are indeed running a terrible business).
As such, looking at stocks with many years of dividend raises limits your universe of available businesses for investment. Looking at only dividend growth stocks for investment practically forces you by default to focus on high-quality businesses.
For example, Johnson & Johnson (JNJ) didn’t grow its dividend for 56 consecutive years by running a poor business. It was able to do that because it’s running a phenomenal business that has the free cash flow available to sustain that practice.
Now, limiting yourself like this could also cause you to occasionally miss out on a great business that happens to not pay a growing dividend (or a dividend at all). But that opportunity cost is more than offset by the benefit of largely avoiding low-quality investments.
Moreover, because of the nature of building out a dividend growth stock portfolio that’s designed for FIRE, you’re by default also compelled to stick with these companies for the long term. It essentially exorcises out bad habits like trading in and out of stocks by the very nature of the strategy.
If you have the growing dividend income in place to become FIRE, or if that income already covers your lifestyle, there’s no reason why you should want to do anything other than let those businesses go to work for you and pay you your rising dividend income.
You’ll almost certainly be happy to let your snowball roll. And there’s no good reason to be phased by market volatility, either, other than to see short-term volatility as a long-term opportunity.
Protection Against Rising Costs
Most stuff will be more expensive in ten years than it is today. We all know that.
And so even if you have enough passive income to cover your expenses today, you have to ensure that’s still the case tomorrow, ten years from now, and 30 years from now.
Well, inflation protection is built right into dividend growth investing.
After all, it’s the very nature of rising prices that forms part of the dynamic that allows these great companies to log higher profit, which more or less translates to higher dividends.
A bottle of Coca-Cola cost a nickel back in the 30s. Try going down to your grocery store and paying that much today. It can’t be done.
The Coca-Cola Co. (KO), for example, can and will routinely (albeit slowly) increase the prices of its products because it has the product quality, breadth, and demand to do so. And inflation works as a protection mechanism for that process to play out, which means it’s a tailwind of sorts for profit increases over time.
After all, if everything goes up, who’s to notice one particular product or service that’s more expensive tomorrow or a year from now? When everything goes up over time, that becomes the expectation.
And so high-quality companies that pay growing dividends become the ultimate hedge against inflation, as the very nature of inflation means dividends are almost certain to also increase over time.
That’s on top of whatever pricing power a company has, which can be significant when talking about a world-class business with sought-after brands. It’s not like you’re going to switch to an inferior product because the cost of your usual brand increased in price by an amount that slightly exceeded inflation.
This means that dividend growth investing not only protects you against inflation, but it tends to actually increase your purchasing power over time. The dividend growth rates from almost every business I’m invested in has exceeded inflation over the last 10 years. So bring on the inflation!
It Beats The Broader Market
I saved this one for last for personal reasons. But it’s certainly not least.
I’m not all that interested in the broader market. I honestly don’t get the fascination with what other funds/people are doing, but human beings have this innate need to compare themselves.
My FIRE lifestyle has nothing to do with what a particular fund or person is doing relative to me. I don’t wake up at a different time, eat different food, exercise with less intensity, or somehow enjoy my amazing life any less because someone out there might be making money at a faster rate than me (nor would I be happier to know I’m doing better than someone else). I don’t get my “FIRE Card” rescinded because I don’t beat something or someone over any particular period of time.
For those who are keen to compete against the S&P 500 and beat it, however, dividend growth investing is an awfully attractive investment strategy.
Between 1972 and 2016, dividend growers and initiators outperformed an equal-weighted S&P 500 index. That’s per Ned Davis Research, as discussed in a Hartford Funds white paper. And it wasn’t just a little outperformance. The performance difference was massive.
This shouldn’t be surprising.
After all, reinvested dividends account for the great majority of the market’s total return over the long term. That same white paper just linked to above shows that reinvested dividends account for 82% of the S&P 500’s total return since 1960.
And since many high-quality dividend growth stocks feature yields higher than the S&P 500, this effect ends up magnified.
Thus, buying stocks that don’t pay or grow dividends means you’re severely missing out.
Sure, you might be able to pick out a great growth stock (that doesn’t pay any dividends) or two and do really well with those specific investments. But when talking about building a diversified portfolio of high-quality businesses, dividend growth stocks are the best game in town.
When you look at the performance of some of the highest-quality dividend growth stocks out there (including those noted throughout the article), you’ll see that they do very well when stacked up against the broader market over a long period of time.
Of course, this is discussing a long-term viewpoint, which relates back to my third point.
If you’re ready to take advantage of dividend growth investing, you won’t need much to get started.
You’ll first need a brokerage. I personally use Schwab due to the unbeatable deal they gave me when I moved my assets over, but any major brokerage (that gives you the best deal) will do. Once you have a brokerage account opened and funded, you can easily go about buying (and selling, if you so wish) stocks (after, of course, you do your due diligence).
Tools that help you get the most out of your journey to FIRE will also greatly help. Personal Capital aggregates portfolio data, and it allows you to manage your spending and wealth from one spot – for free!
I use Seeking Alpha’s portfolio tracker to track news (dividend announcements, quarterly results, etc.) related to the companies I’m invested in.
And for more thoughts on how to implement this strategy, I’ve written a best-selling book on how to use dividend growth investing to become financially independent.
See the bottom of this article for further resources to get you started.
I find dividend growth investing to be a phenomenal long-term investment strategy.
It’s so phenomenal, in fact, that I literally bet my life on it.
I set aside a six-year chunk of my life and dedicated it almost wholly to aggressively investing in high-quality dividend growth stocks to the best of my ability. And that focused intensity led to going from below broke to financially free in that six-year time frame.
Even now, the strategy forms the foundation of my life.
The growing dividend income my portfolio generates on my behalf underpins everything I’m able to do. Being a pretty rational and reasonable person, I wouldn’t use this strategy if I had any doubts about it.
There are many reasons I love this strategy. I didn’t discuss all of them. The low barriers to entry (buying a stock costs almost nothing in terms of time and money these days) is another fantastic aspect of this strategy that compares very favorably to other avenues for building wealth and passive income.
But these five reasons are my top reasons why I’ve wholeheartedly believed in this strategy – and continue to believe every day.
However, it doesn’t take a big leap for me to believe. I wake up just about every day to a fresh dividend in my account. That real-life cash flow is the concrete “proof in the pudding” that reinforces my belief. And I suppose every person or company that collects money from me on a regular basis as I go about spending my money also believes, since it’s cold, hard cash hitting their hands when I pay for their products and/or services.
This article wasn’t designed to talk anyone into this strategy. You should find and take advantage of a strategy (or set of strategies) that make the most sense for you and your goals.
But if these aforementioned dynamics appeal to you, dividend growth investing is about as good as it gets.
Full disclosure: I’m long all aforementioned stocks.
What do you think? What are some of your favorite aspects of dividend growth investing?
Thanks for reading.
Image courtesy of: Sira Anamwong at FreeDigitalPhotos.net.
P.S. Make sure to check out some amazing resources related to dividend growth investing, all of which I’ve personally used on my way to achieving financial freedom in my early 30s. Many resources are listed above, but there are a number of books I’ve also included that are extremely valuable.