Dividend Growth Stocks
Every investor should have dividend growth stocks as part of their asset allocation. A diversified portfolio should include stocks of companies who have the ability to pay and grow their dividends. In general, dividend growth stocks should be mature companies with stable business models, sound balance sheets, and rising net cash flow.
Advantages of Dividend Growth Investing
There are important advantages to reinvesting dividends. Substantial long term gains can be reaped from re-investment of growing dividends. The exponential power of dividend growth compounding can provide competitive returns regardless of whether the price of the stock increases in value or not. In addition, the dividend payout of dividend growth stocks provides a cushion against bear markets and inflation protection in retirement.
Principles for the Dividend Growth Investor
There are two key principles to successful dividend investing:
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Dividends should always be re-invested.
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Only sell dividend stocks when something has fundamentally changed in the individual company or industry; OR at cyclical market highs when valuations become very high and overvalued.
Dividend Growth Investors savvy enough to re-invest dividends during bear markets purchase more shares with the dividend while prices are low than when prices are high. Later, when prices recover, the return is actually enhanced by the temporary fall in the stock price. Reinvesting dividends and accumulating more shares during bear markets greatly boosts dividend growth stock returns.
Selling your dividend growth stocks in bear markets totally negates your sound investment strategy. I can only think of two cases when you should sell a dividend growth stock. If something has fundamentally changed in the company or industry that was unforeseen then it may be wise to not stay with that investment. This should be a very rare occurrence if you have done your homework properly and chosen quality stocks.
The other case where you might sell a dividend growth stock would be when it becomes overvalued from too much appreciation. Sometimes, you might invest in a quality company whose valuation rises above that which is reasonable. No one ever goes broke taking big profits. If you can replace your profitable stock with another quality dividend stock that has a better risk/reward ratio, selling the stock would be a good investment decision.
What percentage of your portfolio is in Dividend Growth Stocks?
| AAAMP Blog by Ken Faulkenberry | |
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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