There are some investors who are only interested in capital gains. However there are lots of others who like to invest in shares that will give them a solid regular income in the form of dividends. There are many dividend strategies you can use, but today I want to discuss a very simple, but effective strategy you can use.
Luckily, determining whether you are an investor or a trader is not complicated. A step which is frequently skipped, yes, but complicated? No. Here is how to tell the difference between investing and trading:
You can vary the length of time and the amount of growth that you require, but a good rule of thumb is to look for dividend growth of at least 10% over this period of time.
So you could look at companies that have grown their dividends by this amount every year for the last 10 years, for example, or you could drop down to the last 4 or 5 years if you want to find a few more companies.
The Power of Dividend Growth Few individuals really grasp the profound power of dividend growth investing. As a dividend-paying company and its earnings grow over time, those dividend payouts regularly increase as well. This is called, naturally enough, dividend growth. There are many examples of companies increasing their dividends consecutively for the last 10 years, 20 years, 30 years, and even longer. The power of dividend growth isn’t that a single increase in a quarterly dividend will make you rich, but rather the cumulative impact of increasing dividends over time has a powerful compounding effect. An example: Say you bought $100,000 worth of shares in a high quality, dividend paying company with a current 3% dividend yield, meaning that you would receive $3000 a year in dividends. And let’s also say that the company continues to raise its dividend by 10% each year. After 2 years, you would receive $3300 in dividends; after 3 years, you would receive $3630; after 4 years, you would $3993; and after 5 years you would receive $4392.30. But here’s where the compounding effect takes place. In Year 2, the company increased its dividend distribution by 10% and you received an additional $300, which also represented a 10% increase. But by Year 5, the company’s 10% annual increase from the previous year is an additional $399.30, which for you actually represents a 13% increase based on your initial investment. And that’s only after 5 years – this number and the compounding effect will only increase over time.
Reinvesting Dividends If you reinvest the dividends you receive by using those dividends to purchase additional shares of the stock, you further accelerate the compounding effect. Many companies offer commission free dividend reinvestment plans (called DRIPs) directly to investors and most online brokers offer comparable commission free reinvestment services as well, so this is a realistic and accessible strategy to pretty much everyone. When you reinvest your dividends, those dividends purchase additional shares that, in the next quarter increases the total amount of dividends you receive which in turn purchases additional shares that in the next quarter again increases the total amount of dividends your receive which in turn… you get the idea. Again, stock selection is paramount. Reinvest in a low quality, high dividend stock and you could still wind up with nothing.
Leveraged Investing The first 3 steps represent a proven investing method that builds both wealth and cash flow over time and in any market. All it takes is time and patience. I have found, however, that by adopting certain conservative and customized option trading strategies (which I’ve termed, “Leveraged Investing”) that this proven investing approach can be accelerated. This allows the investor to reap the proven benefits of dividend investing more quickly and to a larger degree. The goal of, and rationale for, Leveraged Investing is to use options intelligently to generate a continual reduction in the cost basis of one’s long term holdings (rebates, if you will) which provides yet another source of funds that can be reinvested back into the acquisition of additional shares.
The key is to be clear on what you are doing: why are you entering a position, what benefit do you expect to receive, and under what circumstances will you close that position. Stay true to your rationale, and you have made the first step toward bringing some cash home from the markets.
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