Winners tend to concentrate on setting goals and creating actionable steps to achieve those goals. Losers, on the other hand, are usually people who look for excuses for their failures and blame others for their own lack of common sense.
When it comes to high-yield stocks, the same thing holds true. To be dividend winner, an investor needs to set a clear goal of target monthly income, a timeline to achieve that goal and the steps to make it happen.
The goal of many dividend investors is to be able to generate a sufficient dividend income stream to live off of. For this example, let’s assume that a dividend investor needs $1,000 per month in distribution income in ten years.
Creating an action plan to realize the goal is a little more complicated. The action plan should spell out how exactly to achieve the target monthly income, which includes the specific strategy the investor would use, the amount of money they need to save and a stress test of expectations regarding how the income stream might perform over time.
After those two basic steps are out of the way, the third step involves accumulating a sum of money in order to start investing. This could include funds from your salary, side business or different brokerage bonuses, for example. Investors who receive low income from their jobs might want to seek better employment — maybe by taking classes.
The fourth step is creating and utilizing a strategy in order to select the best dividend stocks. This strategy should spell out the entry criteria for the group of stocks, when to sell them and how to structure your portfolio. I focus on dividend growth stocks which have raised distributions for over a decade, which have strong competitive advantages, can grow earnings and have a sustainable dividend payout. Having a minimum yield requirement of 2.5% also helps, but it could be argued both ways whether this is sufficient or necessary.
The fifth step involves managing the portfolio of stocks in order to achieve the target return. This involves having proper diversification via exposure to as many sectors as possible, but without sacrificing quality. Investing in dying businesses such as newspaper companies for diversification purposes is not advised. Investing in quality companies from as many sectors as possible that meet the qualitative and quantitative criteria above, however, should be the goal.
In other words, investors who need $1,000 in monthly dividend income and who come up with a portfolio of dividend growth stocks yielding 3% today would need $400,000 in capital. However, if these dividend stocks raise distributions by 7% per year for the next decade and $1,000 is needed ten years from now, the minimum capital requirement will be almost $200,000. However, if the dividends are reinvested every year, the capital needed today will be much less than $200,000.
Some stocks which fit the profile for this strategy include:
Pepsi (NYSE:PEP) engages in the manufacture and sale of snacks, carbonated and non-carbonated beverages, dairy products and other foods worldwide. This dividend champion has boosted shareholder distributions for 40 years in a row and has raised them at a rate of more than 13% per year over the past decade. The stock is currently attractively yielding 3%. For a full analysis, go here.
Another solid dividend payer is Medtronic (NYSE:MDT), which manufactures and sells device-based medical therapies worldwide. It has boosted shareholder distributions for 35 years in a row and has raised them at a rate of 15.8% year over the last ten years. The stock is currently attractively valued at 12.50 times earnings but only yields 2.3%, so I would only add to my position on dips below $41.60. Read more on MDT.
Chevron (NYSE:CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It has increased its dividends for a quarter-century straight — and at a solid rate of 8.8% a year in the past decade. The stock is currently attractively valued at 8.7 times earnings and yields 3.1%. Learn more about it here.
The final pick is Walgreen (NYSE:WAG), a company that operates a chain of U.S. drugstores. For a whopping 37 years, WAG has increased its payout and the past decade has seen an impressive rate of 18.9% each year. Plus, the stock is currently attractively valued at 14.7 times earnings and yields 3%. Read more about WAG here.
As of this writing, Dividend Growth Investor was long PEP, MDT, CVX and WAG.