Why Dividend Growth Stocks?

Initially I was going to write a post about using options with JNJ, but based on its current valuation and the relatively poor options yields I’ve decided that it wouldn’t be that interesting of an article as I’m not interested in writing covered calls or in writing cash-secured puts at this point in time.  Instead, I’m going to elaborate on my preference to invest in companies that have shown a commitment to increasing their dividend for a number of years.  Though I do not restrict my stock selection to this universe, the bulk of my portfolio is allocated to these types of positions.  The reason for this is two-fold.

1.)  Dividends provide a margin of safety on my investment

First and foremost, I see dividend payments by the companies I invest in as providing a margin of safety (and immediate return) on my investment.  As I am looking to invest in companies with a reasonable expectation of a double digit annual return (over an appropriate time frame), by receiving a few percentage points in dividends, it helps to compensate for any unforeseen difficulties that the company may experience.

2.)  I eventually want to live off the income generated by my portfolio

The long-term goal of my portfolio is to finance retirement based solely on the income generated by my investments.  This is to ensure that I am not forced to liquidate portions of my holdings during significant bear markets (low valuations) which can adversely affect the longevity of a retirement portfolio.  Furthermore, to combat the effects of inflation, I want to be invested in assets that increase their annual payout at or above the rate of inflation.  Of all the investment options available, dividend growth stocks are one of the few asset classes that fulfill this requirement.  As a bonus, in the current market (and interest rate) environment, I consider them to be the most attractively priced option.

Summary:

The steady performance of well established dividend growth companies lets me sleep easy at night without worrying about short term swings in valuation (except for getting excited about good entry points for additional positions).  Paraphrasing Warren Buffett, ‘buy on the assumption that they could close the market the next day and not reopen it for five years.’  With a portfolio of high quality dividend growth companies providing an ever increasing annual income stream, this isn’t nearly as frightening a proposition as it could be.

Until next time,
Nathan @ EngineeringIncome.com

Disclaimer:
The data and opinions presented above are for educational purposes only and should not be construed as individualized investment advice or as a recommendation to buy or sell the securities in question.  The investing methodology outlined on this site assumes that a stock will perform in the future as it has in the past.  This is generally not true.  It is the responsibility of individuals to perform their own due diligence and/or consult their investment adviser to determine the suitability of any given investment product for their specific situation.  For more information, please see my disclaimer.

Full Disclosure: Long JNJ at the time of this writing.

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