My main personal motivation for becoming a Dividend Income investor was the death of my wife. When my wife died I realized I still had two minor children living at home that I now had the sole responsibility for. I had two other children that were grown and married with good jobs so I knew they would be okay but what about the two minor children? I wanted to ensure my two youngest children were provided for. Reviewing my Investments I realized that even with leaving my two youngest children the entire Insurance policy I had would not be enough to support them for more than a could make it for a minimum of six years financially to ensure their well being. So this is when I switched couple of years. My youngest child was 14 years old at the time so my thought was that I needed to ensure they I sold most stock that was paying dividends below a 5% yield. My main focus became providing enough income for them to live on should anything happen to me. This meant sticking my investing neck out and taking on some risks that I hadn’t been willing to do. I increased my average yield from less than 4% to right at 10%! Now I know what many will say – Why be so risky buying higher yield stocks when everyone says they are “Yield Traps” or “very risky”.
Amazingly what I discovered was that my new way of investing was not any more risky than my previous “safe” style yet I was bringing in right at three times the amount of monthly income. Since I was not in need of the extra income it was being reinvested into even more stocks. In other words my income was now compounding about 2 times faster than it was previously and it did not take me very long at all to make sure that my monthly income goals of providing for my children were met.
Did I have any failures? Sure, a couple of stocks that I purchased cut their dividends but I simply sold them and bought other stocks that were paying similar , if not more in Dividends than the stocks that I was replacing. A few stocks, I kept in spite of the dividend cuts. An example is a stock that I purchased during the oil bust. I remember one in particular was paying over 30% in dividend yield and after the cut I was still receiving a yield in excess of 15% so I decided to keep it. My reasoning was that a 15% yield is great by any measure, and that the company having reduced its dividend was in much better shape financially. Of course by practicing “risk mitigation” (see chapter —-) I had not put an excessive amount of my investment money at risk, even if I had lost every penny of that stock. I am now near three years into my new style of Investing so I am sure you would ask , do I regret switching to my new style of investing that I call Dividend Income Investing? The answer is absolutely not.
My Dividend income has increased almost every single month. Now of course you have to be smart and selective and make sure not to get too greedy with the yields. A portfolio yielding 8-10 % is quite doable. One of the first things you have to look at is the yield out of whack with the Sector it is in. Many stocks like MLPs, REITs and BDCs naturally pay out more in Dividends and Distributions. This is so because they are either passing on taxes to you, or because they are required to pay out distributions as a percentage of their Revenue. The other very important step is to do a little (or better a lot) of research to make sure the company is on solid ground and is not in danger of going bankrupt or drastically cutting its dividend. You don’t have to be an expert in the Charts and financials of each company, much of which is very confusing to the average investor but I have found a great way to research companies is to read every single article you can find before investing. I even like to read the comment sections below the articles to see if the average Joe agrees with the author’s conclusions. Once I have determined the company as a safe investment then I act upon it.
The amazing thing is my portfolio generates much more than it would otherwise and with the extra dividends I can purchase even more stock which helps to make the Portfolio safer each and every month as well as grow in value!
Now I am not an Financial Advisor, so I can’t say my method will work for you, but what I can say it has worked very well for me.
Please feel free to share your comments below, I look forward to hearing what you think.