Story of Dividend Growth Investing
The Income Problem
Prior to the time that my wife and I were to retire, planning for retirement income made it clear that we had problems. Neither of us had pensions coming because what small pensions that existed were rolled into the existing IRAs. Our future income depended on social security payments and our savings.
The Income Goal
The goal was a safe, reliable, consistent, growing income stream. This growth in income had to be about three times the rate of inflation so that we could keep ahead of our expenses, and so that this income could soften the need for any withdrawals from savings. In the beginning, we were told that investments that would generate such an income stream did not exist. But the search continued.
Years of Research
After several years of intense research into all categories of income products, the search for an income stream with the right characteristics settled on three categories of income products that historically could be expected to have very high dividend growth rates. These categories were Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs), and dividend paying stocks. Of these three, it is very difficult to predict the future growth of payouts from individual MLPs and REITs, although many advisors and analysts are trying their best. For individual companies, it is much easier to predict dividend growth rates from historical data on payout rates, financial health, management commitment to the dividend, etc. So the search for a safe, growing and reliable income stream focused on dividend paying companies.
Several more years of research went into the discovery of exactly what about a company would make it a candidate to reliably increase its dividends at a rate equal to three times the inflation rate. This research included how to identify which aspects of a company were relevant, and how to evaluate those aspects. Some variables are related to financial health, some are related to the sector of the economy in which the company operates, and some factors depend on management attitudes. This research included the discovery of what data to collect about a company, where to find the data, how to collect the data, and finally, how to evaluate the data in a consistent manner for all companies.
Several portfolios were developed as a result of this research, and this led to the publication of a how-to book for those ordinary investors that want to build a safe, growing income stream for themselves. The book was named “Dividend Growth Investing” and is available for purchase here.
The portfolio represented in the Model Portfolio is a real portfolio of companies that have characteristics that reliably predict payout growth rates at compounded rates of 8% - 10% for years into the future. Other rules are employed that require “adequate” beginning yields, and that reduce risks using diversification techniques, and that consider tax implications whenever possible.