My Introduction to Dividend Investing and Multiple Streams of Income

My Introduction to Dividend Investing and Multiple Streams of Income

Throughout the life of this blog I have talked about my desire to create multiple streams of income.  While I have been trying to do more side legal work in addition to my day job and I have my prosper account up and running, I have yet to create a dividend based portfolio which is something I have wanted for a long time.  I have never claimed to be an investing guru, or any kind of guru for that matter, but especially not an investing expert.  My 401(k) is almost completely in low cost mutual funds and my speculation account isn’t doing that hot lol, and it is just that, speculation coupled with covered calls.

My Introduction to The Dividend Aristocrats

So I checked out a blog that I recently discovered Dividend Growth Investor.  After searching all over his site, I found some interesting terms:

    • Dividend Aristocrats – Dividend aristocrats are companies in the S&P 500 that have increased dividend payouts to shareholders every year for the last 25 years.

Dividend Growth Investor recently just highlighted 10 of those companies which distributed increasing dividends for 50 years!

Starting my Dividend Stock Choices

I could simply just purchase the many ETFs that try to track these companies, but that is not the point of this account.  I wanted to choose individual stocks (unlike my 401(k)) and I wanted to invest rather just speculate (like my speculating account).

So, I decided if I was going to pick a handful of stocks for this special account I am going to pick them from the Dividend Aristocrats.  I figured if a company was able to raise dividends for 25 years they are good start.  As if I needed to remind anyone during the last 25 years (1985 till today) we have had a Savings and Loan issue, a dot com bust, housing and credit bust, and 5 different presidents.

Going right to the source I went Standard and Poors and found the following stocks to be on the 2010 list:

TICKER COMPANY SECTOR 12/31/2009
MMM 3M Co Industrials
ABT Abbott Laboratories Health Care
AFL AFLAC Inc Financials
APD Air Products & Chemicals Materials
ADM Archer-Daniels-Midland Consumer Staples
ADP Automatic Data Proc Information Technology
BCR Bard (C.R.) Health Care
BDX Becton, Dickinson Health Care
BMS Bemis Materials
BF.B Brown-Forman’B’ Consumer Staples
CTL CenturyTel Inc Telecommunication Services
CB Chubb Corp Financials
CINF Cincinnati Financial Financials
CTAS Cintas Industrials
CLX Clorox Co Consumer Staples
KO Coca-Cola Co Consumer Staples
ED Consolidated Edison Utilities
DOV Dover Corp Industrials
EMR Emerson Electric Industrials
XOM Exxon Mobil Energy
FDO Family Dollar Stores Consumer Discretionary
GWW Grainger (W.W.) Industrials
TEG Integrys Energy Group Utilities
JNJ Johnson & Johnson Health Care
KMB Kimberly-Clark Consumer Staples
LEG Leggett & Platt Consumer Discretionary
LLY Lilly (Eli) Health Care
LOW Lowe’s Cos Consumer Discretionary
MCD McDonald’s Corp Consumer Discretionary
MHP McGraw-Hill Companies Consumer Discretionary
PEP PepsiCo Inc Consumer Staples
PBI Pitney Bowes Industrials
PPG PPG Indus Materials
PG Procter & Gamble Consumer Staples
STR Questar Corp Utilities
SHW Sherwin-Williams Consumer Discretionary
SIAL Sigma-Aldrich Materials
SWK Stanley Works Consumer Discretionary
SVU Supervalu Inc Consumer Staples
TGT Target Corp Consumer Discretionary
VFC VF Corp Consumer Discretionary
WMT Wal-Mart Stores Consumer Staples
WAG Walgreen Co Consumer Staples

Now that I have it down to a list of 43 I can start to research each company and determine which 4 or 5 I should Dollar Cost Average into.

I know I will be looking at Cash Flow & a Low P/E but what other factors should I be looking for?

17 Responses to My Introduction to Dividend Investing and Multiple Streams of Income

  1. I can’t speak with any deep knowledge of US stocks, being a UK investor, but in general you also want to look for dividend cover (how well the payment is covered by earnings per share).

    Also, take a look at other competing claims on the cash (e.g. big debts or pension liabilities -> you sometimes).

    Make sure a company isn’t just increasing dividends by taking on debt or even issuing capital and then paying out dividends from the proceeds.

    Beware, too, of buying low yielding stocks in expectation of future dividend growth. This seems popular in the US but it can be just another way of paying a high price for growth that ultimately doesn’t come.

    You might want to look for a passive ETF that does all this for you, and stops you having to worry about the detail. There’s a lot of choice in the US.

    • Thanks for those metrics. I like that look out on the pension liability I would have never thought of that!

      I could use an etf, but I feel like with all my 401(k)s in mutual funds I actually want to get into the act of picking individual stocks for this adventure.

  2. I like to focus on a few key metrics:

    Dividend Yield > 7.5%
    Trailing P/E < 15
    Future P/E < 15
    Price to Book 1%

    I can get more detailed of course depending on how aggressively I set the screening metrics, but the parameters I’ve listed will, by in large, select for high dividend payers like REITs, hydrocarbon MLPs, specialty finance companies (publicly traded VC companies), and maybe even a few preferred stocks.

    I use the free stock screener at Zacks.com, and would highly suggest it over others like Google or MSN as I’ve routinely found errors in their database.

    If you don’t want to be a stock picker, you could also look into popular dividend ETFs:

    S&P 500 Preferred Stocks – PFF
    Vanguard Dividend Appreciation – VIG
    S&P Dividend Aristocrats – SDY

    The big worry of course is buying a stock for the dividend, and then they can’t pay it. So you’ll have to look through the cash flow statements or set your screener to compensate for low cash flow companies.

      • Certainly, but I think anything >20 probably isn’t the toughest screen you can make.

        Maybe tighten up the variables or toss in another metric, like price to book (to get the best value) below 1.0.

        • Matt,

          I am loving your insight on this subject! In my next post I highlight spreadsheets I created which show P/E vs Industry P/E and Profit Margin vs Industry Profit Margin…then Yields and if I STILL have too many to chose from I am going to add in price to book.

          Thanks for all your help! I can’t wait to hear from you on the next post

  3. Also don’t forget the DRIP (Dividend reinvestment plan) so that your dividends can be used to help boost your long-term returns.

  4. I entered my first foray into dividend funds (as I call them) last year. It’s really an experiment to replace my “eating out at lunch expense”. So far it’s doing okay.

    I also have bought some Realty Income “ticker O” stock, outside of the lunch experiment above. It’s a bit more risky, but it has a big juicy dividend. As I get more money to invest, I’ll throttle back to more conservative dividend stocks like “McD” (actually I have this on in my wife’s Roth IRA).

    Here’s luck to us!

  5. I think Matt SF above means Price to Book 1:1 ratio perhaps? Price to book 1% doesn’t make sense. I’d buy any company that’s price was 1% of it’s book value!

    I like looking for a low debt/equity ratio, companies buying back shares, and revenue and EPS growth.

    As an accounting geek, I can’t wait to see those spreadsheets.

  6. I don’t claim to be an investing guru either. I usually leave it to the professionals. In my past life when I was learning about stocks I thoroughly enjoyed the Investors Business Daily. I definitely recommend taking a look at it. They have their own qualifications for helping you pick the right stocks and the information in the newspaper supports their qualifications so it’s even easier. Thanks for the info.

  7. I typically look for the following characteristics in dividend stocks:

    1) The company must have raised annual dividends for at least 10 years in a row
    2) The company must have earnings growth over the past decade
    3) The dividend payout ratio should be below 50% ( for REITS, MLPs, BDC etc I am going to look at the trend in the payout ratio)
    4) I do not want to pay more than 20 times for earnings
    5) I try to buy stocks whihc yield at least 3%, although I have bought stocks like WMT that yield 2%, by grouping this position with a higehr yielding stock…

  8. Evan,

    Did you find him through SeekingAlpha? DGI has some good stuff, like his “aristocrat” label.

    What about his spreadsheets? Have you downloaded those for analysis.

    I WANTED to dominate your comment board ;) but IJ shifted everything!

    • Nope I found him through a blog carnival I hosted a few weeks ago. I created my own spreadsheets.

      You are always welcome to dominate my comments! I Love getting them

  9. The only thing I’d add is to make sure you consider the growth of the dividend as well. Utility companies may only grow their dividend by 1% to 3% per year, where as a company like Johnson and Johnson has grown their dividend by over 10% for the last decade. So that becomes important as you snowball your income stream.

    Really, your income stream is going to grow three ways. Early on the most substantial way is by adding more funds from savings into stocks. That will of course produce a growing income stream. The second way the stream will grow is through reinvesting the dividends you earn. And finally, the third way is through the companies that you own increasing their dividend distribution. So 3 different ways to grow that stream of income coming in, all important in their own right.

    If you can’t tell, I love me some dividend investing! Cool to see Dividend Growth Investor commenting as well, since I really love his analysis. Anyways, great post!

    • Thanks for stopping by NtD.

      Luckily, I am doing the first 2 ways and then the third I am hoping will continue which is why I searched out those companies which have increased their dividend for decades upon decades!

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