Start earning passive income from stocks – DGI
This is my first post on Steemit.
I hope you will enjoy the post and follow me for future posts on the topic of passive income. I'm an 23 year old student from Norway, studying business.
I got interested in dividend growth investing about 2 years ago. I have been trading stocks since I was 18 with varied results. I found DGI to be my thing and have been focused on doing it since.
Dividend growth investing is not for people who want to make money quickly, but for people who have the patience to see their dividend increase over time. My short-term goal is to get paid $250 in dividends this year. By reinvesting those $250+$6250 from savings per year, my next year’s dividend will be $510. Year 3: $780, Year 4: $1062, Year 5: $1354…
As time goes on, I will try to increase the yearly investment so the compounding interest effect is even larger.
Time is the best factor for success in the stock market, if we believe that historic trends will continue. Over the last 45 years S&P 500 has returned an average return of 12% a year.
What is dividend growth investing?
Dividend growth investing is creating a diversified portfolio of stocks whose underlying companies have the ability to pay and grow their dividend for long periods of time.
Why is dividends important you might say? Well, if a company is able to raise their dividend year after year, it probably means that they are able to grow their earnings as well. The dividend of a company is therefore a good indicator of a stock that can have positive future earnings as well.
Companies often pay cash dividend to shareholders on a quarterly basis. By buying these companies you as a shareholder are eligible for dividends. At first you might only afford to buy a small number of shares in a company, and this will typically give you 3-5% cash dividend per share. If you invest $1000 this would equate to $30 a year. These $30 can then be reinvested into the share, granting you more dividends. By doing this over an extended period you will capitalize on the effects of compound interest. Even though the amount invested will stay something stable, the compounded dividends will stack up significantly. Over time the number of shares that you have will increase (through reinvestment) which will give you more dividend. In addition to this, companies will raise their dividend so that dividends per share will also increase. So even though the stock price doesn’t increase, you can capitalize on the dividends of the company.
So, how do you get started with this strategy? And what are important when doing this strategy? I will list some important points to remember when investing.
1. Thinking like a business owner
Because you are getting paid to wait, you must make sure to invest in companies that you are confident that will keep (and) increase their dividend. Thinking like a business owner also means that when you are buying a stock, you become a partial owner in that business. If the company cuts their dividend, sell. If the company takes a different direction that you don’t believe in, sell.
2. Invest in companies with a good track record during bear markets
Because you are a long-term investor, you shouldn’t have to care about volatility in the market. The most important thing is that companies are continuing to pay their dividend. A bull market will then mean that you are able to buy more shares (since the market is down) and you will therefore be able to get more dividends then if the stock price was high.
3. Dividend yield is not everything
Earlier I wrote that companies that you want to invest in typically pay yearly dividend of 2-5% a year. Some companies pay way more.
If companies pay out most of their earning as dividend this could mean a couple things. First, they might not have other good options for the money. Remember that companies typically reinvest revenue or pay it out as dividends. This means that growth might be limited, so that the company will not make enough money in the future. Other companies pay out most of their earnings in good periods and then pay no dividends in bad periods. As a dividend growth investor, you want your stocks to pay out growing dividends every year, so this is bad.
Last point is that some companies might only have a 2% dividend yield, but their dividend growth rate might be much higher than a company giving 4% dividend. This would implicate that the first company may have much more room to grow and should therefore not be neglected just because of the lower dividend yield.
That is good for my first post If you are interested in dividend growth investing, make sure to follow me, I will continue to make posts about the topic. If you have any questions please let me know.