I will add to this list as I come across excellent dividend growth investing concepts.
1. View dividend-paying companies as geese which lay golden eggs (the dividends). If you sell them, you are killing the geese.
2. I manage my portfolio of dividend growth stocks as if I’m managing a business. I aim to buy shares at proper valuations to generate an income that grows faster than inflation every year. Learn how to pick a value investment for dividend growth and success.
3. High dividend yield companies with yields of 4% – 6%, which are generally safer than, say, 10%+ yield companies, provide current income to buy more shares, perhaps of lower yield, but higher growth companies.
4. The younger investor in his or her 20s, 30s, or even 40s might want to sprinkle his or her dividend growth portfolio with companies, which have lower starting yields but higher dividend growth. Most of the returns will come from capital appreciation instead of dividends.
Companies that come to mind include Nike Inc (NYSE:NKE) and Walt Disney Co (NYSE:DIS) which yield less than 2% but are expected to grow their earnings per share at a rate greater than 10%.
5. The amount of dividends you receive is based on the number of shares you own in a company. So, for the long-term income portfolio, it makes sense to buy more shares in high-quality companies on price dips.
6. Compounding is one of the most powerful concepts of dividend-growth investing. However, it takes time to notice its power. You might not notice its work until a decade later. Time and the rate of compounding helps you build wealth over time.
Depending on your unique situation (time horizon, risk tolerance, temperament, experience, etc.), your compounding rate would be different. Obviously, the higher the rate, the faster the compounding. Here’s how you can see income compounding results in the early years of dividend growth investing.
However, typically, the higher the rate of return you’re targeting, the riskier your investments may be.
7. Unrealized capital gains are tax-deferred until you sell the shares. So, in the non-registered (taxable) account, buying solid higher growth businesses can be a great way to defer taxes.
It’s a legal way of “avoiding” taxes. Examples of above-average growth dividend-paying companies in Canada are Alimentation Couche-Tard (TSX:ATD.B), Metro, Inc. (TSX:MRU), and Canadian National Railway Company (TSX:CNR)(NYSE:CNI).
Make sure you don’t overpay for these companies by checking their valuations! Additionally, Canadian National Railway is cyclical, so investors should aim to buy it at a discounted valuation.
8. Great businesses can perform badly sometimes. You need to stick with them until they perform well again, otherwise, you might panic and sell at a loss.
Think about the Canadian banks in the financial crisis of 2008-2009. The big Canadian banks, such as Toronto-Dominion Bank (TSX:TD)(NYSE:TD) declined as much as 50% from a high in 2008 to a low in 2009 but recovered nicely by 2010. And the shares have steadily continued its way upward.
9. Before buying a stock with the idea that the business will bring the stock price up and continue paying dividends, think about what might cause the stock to go down or cut its dividends.