The next step is to build your diversified portfolio of stocks that consistently increase their dividend every year. To provide good diversification I recommend investing in 22 companies two each from 11 different sectors (i.e.: Consumer Staples, Healthcare, Finance, Technology, REIT etc.). Purchasing stock in $1,000 increments it will take time to build up to 22 positions. You will buy only the best dividend growth stocks at or below fair value. Warren Buffett has a famous quote that applies here:
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
You might be thinking: “this sounds great, but how do you do this?” Don’t worry I know this sounds complicated, but we have made it really simple to do by providing a list of the Best Dividend Growth Stocks categorized by sector and value for you to choose from.
Step 1 – Create Your Wishlist
Your wishlist will be comprised of the 20 highest quality dividend growth companies that you want to own in your portfolio regardless of current valuation. You will develop your list based on strength of the company, the growth potential of its dividends, and the potential sustainability of future dividend growth.
Strength
Years Increased – This is the number of consecutive years of dividend increases the higher the number of consecutive years the better or stronger the company.
Competitive Advantage – This is a rating of the strength of a company to continue its on-going success due to the strength of its competitive advantages over other companies they compete against. A company must have a at least a ‘Medium’ rating to be considered for our ‘Best Dividend Growth Stock’ list. ‘Strong is the highest rating of the three which are: Strong, Medium, and None.
Growth Potential
Dividend Yield – The current dividend yield of a Company (dividend payment amount / current price). I prefer a minimum of 2.00% at time of purchase, but the overall average of your wishlist should be in the 3.00 to 3.50% range.
5-Year Dividend Growth Rate – The average dividend growth rate over the past 5 years. For individually stocks I prefer a 5-year DGR greater than 5.00% to stay ahead of inflation during retirement. The overall average of your wishlist should be in the 8% to 12% range.
Sustainability
Estimated 5-Year EPS Growth – The estimated annual Earning Per Share (EPS) growth for the next five years. Ideally I like to see the company earnings growth close to the 5 Year DGR which is one indicator of maintaining dividend growth rate into the future. EPS growth rates above the DGR is one sign of possible higher dividend growth rates in the future.
Payout Ratio – Annual earning per share / dividends per share = the ratio of earning paid out to shareholders in the form of dividends. The lower the payout ratio the better, since it leaves room for consistent dividend growth. For individual stocks I prefer payout ratios below 75%, however high payout ratio’s may be acceptable in providing a sustainable dividend payment and should be evaluated on the individual stock and industry it’s in. For example, many companies are required to payout the majority of earning in dividends (e.g.: utilities, REITs MLPs, and tobacco companies).
Step 2 – When to Buy
Look to purchase stock soon as you have $1,000 of cash in your Roth IRA account. If you are automatically contributing monthly then this will happen about every 2-3 months throughout the year for a total of five $1,000 purchases.
Step 3 – How Much to Buy
Purchase roughly $1000 worth of one stock. I say roughly because you need to have enough money to cover your discount broker’s commission fee usually around $5 to $10. For example, let’s say that company stock XYZ (currently selling for $42 per share) is the next qualified stock to purchase. To determine how many shares of XYZ you can buy for $1000; simply divide $1000 by the $42 stock price which gives you 23.81 shares then round down to the nearest whole number (23). Stock is always purchased in whole number amounts and this usually provides enough cushion to cover the commission fee.
Step 4 – What to Buy
- Purchase stock in $1K increments when they are 20% or more below fair value from our Best Dividend Growth Stocks list that you do not already own stock in until you own one stock from each of the 10 different sectors. If there are no stocks at a 20% discount, skip making a purchase that month and look again the next month or when you receive an email notification from DividendGeek.com.
- Each time you have another $1K in cash saved up in your account (every 2-3 months) look to purchase another $1K worth of stock at the deepest discount, keeping your portfolio as balanced as possible between sectors.
- Once you have purchased one stock from each of the 10 sectors ($10,000 total) repeat this process. Except now that you own 10 stocks you will simply repurchase more shares of the existing stock that you own when they are priced below your purchase price or when they are at a 20% discount to fair value.
The basic idea here is that as soon as you have saved up $1000 in your Roth IRA account you are going to look at the best dividend growth stock list and purchase a stock trading at a 20% or more discount to fair value from one of the 10 sectors that you do not already own. Continue this process until you have made a $1000 purchase of a stock from each of the 10 sectors.
Step 4 – Setup Dividends to be Reinvested
A few days after you first buy a stock you’ll be able to enroll it in a dividend reinvestment program (DRIP). This is a free service, just check with your broker on how to enroll your stock. It allows you to reinvest your dividends back into more shares of stock without incurring any commission costs. More importantly is that it enables your portfolio to take advantage of the power of compounded growth.
That’s it!
Pretty simple and straight forward really. Just keep buying these great stocks when you have $1,000 saved up in your Roth IRA and watch your portfolio accumulate more shares of stock that generate more dividends from dividend payments that are growing on average by 10% every year! More importantly watch your passive income increase with every reinvested dividend payment and stock purchase! Remember this takes time – be patient and stick to the plan and you will be rewarded handsomely!