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Thursday, June 20, 2019

How to Make Money Using Dividend Growth Investing Strategy

Before I start explaining about “Dividend Growth Investing”, we need to understand the basic of dividends. A dividend is a distribution of income from a portion of company’s earning (net profit) and it’s paid to its shareholders. Dividends are decided and managed by the company’s board of directors, and they must be approved by the shareholders by voting rights. Dividend Growth Investing is a simple strategy of purchasing stocks that are paying dividends and have been growing their dividends from the past year. A Dividend Growth Investor also can benefit from the capital appreciation from the dividend paying stock. The goal is to look for dividend paying companies that have strong track record of paying dividends. In addition, the companies need to have strong financial fundamental as well as the quality of the company. The strategy to Dividend Growth Investing is to seek for companies that increase their dividend payment overtime. So how do you make money using dividend growth investing strategy?

Dividend Growth Investing Explained
The way you make money from dividend growth investing is to invest in companies that pay out dividends. Before you start, you’ll need to know some key principles. A dividend growth investor is not “a one day get rich kind of technique”, but it requires strong discipline and patients. You’ll need to have a long time horizon before you can start enjoying the passive income it contributes. I know that it requires delay gratification before you can enjoy the fruits from these companies, but through compound interest, the reward is really gratifying. An example of a stock that is considered to be a dividend growth stock is Home Depot Inc (Ticker: HD). This company is a solid dividend paying company that has been increasing its dividend for years. If you take a look at its stock price in January 1990, Home Depot Inc. was trading at a price range $1.80 range and it was paying roughly $0.04 in dividends per annual. Since this company has been growing over the past years, the company is now (year 2019) trading $200 range and most satisfying part is that its annual dividend payout is at $4.12. Imagine if you have invested $10,000 during that time. Your $10,000 would have been able to purchase 5555 shares of Home Depot Inc. stocks, and your 5555 shares would have a market value of $1,100,000 now (year 2019). Your investment practically has a return over 11,000% and your 5555 shares would be paying a dividend amount of $22,886 in the year of 2018. The example I show you is not including dividend reinvested into the company. The numbers would be greater than that if you have reinvested those dividendpayments throughout the years since you would have accumulated more shares throughout the process. In addition, the numbers would be higher if you have added additional money to your investment. This is an example of how one of the richest investor, Warren Buffett amasses a great amount of wealth.

What Are The Steps to Find Attractive Dividend Growth Stocks?
I mentioned about the Home Depot Inc. scenario, but how do we find attractive dividend growth stocks that multiply like the example. The answer to this is that you’ll need to gain some financial knowledge and some common sense. 
Here are some methods below. 
  • Being able to read a financial statement. 
    You’ll need to track the company financial performance over the past year. Check if their earnings have been growing over the past year and make a conclusion whether the company would increase their earnings in the future years. If you feel that this company could grow in futures ahead, then you have found a company that has potential to be a good dividend growth investment.
  • Is the Stock Reasonably Valued?
    This is one of the most important key factors to find a great dividend growth stock. You’ll need to check whether the company you are investing in is fairly priced and not overvalued. You have to run a quantitative analysis such as:
    - Price/Earnings Per Share ratio of less than 20x.
    - Enterprise Value/EBITDA ratio of less than 10x.
    - Have a Dividend Payout ratio of less than 60%
    - Having dividend increase of 5% or more in the past 5 years.

    These are just some examples of ratios you can use to analyze a company performance, but there are still more to this. A company’s quantitative performance is one of the important key factors; however you’ll also need to see the quality of the company story.
  • Make Sure The Quality of the Company
    Being able to read the financial statement is one way to seek for a good dividend growth stock, but you’ll need to make sure the company has good management and business. Trust me, a company earning history doesn’t guarantee that it will do great in the future. I have fallen to this issue before, and would like to share my story with you. I have made a huge investment mistake in one gaming retailer called Game Stop Corp. (Ticker: GME). I analyze the company financial statement such as their Income Statement, Balance Sheet, and Cash Flow Statement. The company was a dividend paying stock. When I analyze the company, I was surprised that the company has good financial performance and make a conclusion that the stock was undervalued. However, I didn’t realize that the gaming industry was changing rapidly. People were not purchasing games through this retailer, instead purchasing it via online. Due to that, their earnings were going under quarter after quarter. I didn’t expect that the business would have gone to a decline this fast and the worst case; their management decided to stop paying dividend. I had no choice but to accept that I made a huge mistake investing in this company and decide to cut my loss. It was a horrific moment for me since I lost a total of $40,000 in this one investment. From this lesson, I decide that I would not just see a company financial statement but also to see the quality of this company. Warren E. Buffett mentioned before that it is better to invest in a great quality company at a fair price rather than investing in a bad company in a under value territory. You want to see whether this company would still exist futures ahead. 
  • Understand The Companies’ Business Model
    I think this is one of most crucial part of being a dividend growth investor. You need to understand what the business does to earn those incomes. If the company is complicated and difficult to understand, the best way is to stay out from them. Invest in companies that are easy to understand. This will increase your likelihood in investing in a great dividend growth paying stocks. Coca Cola Co. (Ticker: KO) is an example of a business that is easy to understand. Even Warren E. Buffett loves this company so much and is one of his major holding in Berkshire Hathaway Portfolio. The company doesn’t need much introduction as for many you readers perhaps already know about this company. It is one of the world famous and big brands in beverages industry. The company is a strong company that has a strong economic moat and would stay in business even decades ahead. The reason why Warren E. Buffett invests in this company is due to its branding power. I myself can’t resist in purchasing Coca Cola drink when I’m eating in any restaurants. The products sell and the business is easy to understand!

The Bottom Line
So I have explained how you can make money with the Dividend Growth Investing Strategy. The way you want to build wealth through dividend growth investing is to be patient and discipline in adding more capital contribution towards your dividend growth portfolio and reinvest the dividend you receive which will make a compounding effect. The more often you recycle your dividend income back into your portfolio the better result you’ll have in the future. This strategy is a long term approach and it requires you to delay gratification; however the outcome would be immense. I hope you readers can emulate the steps that I’m using to choose a good dividend growth stock and start making money!

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