Before we start, I would like to share few considerations with you before you pull the trigger and start investing yourself directly on the stock market:
- have you paid of your debts and have you build an emergency fund for a rainy day? If not, I would like to recommend you to read the following blog post first:
- is your partner OK with it? Investing in dividend growth stocks directly in the stock market has changed my behavior and mindset, but what if your partner isn’t fully “on board” with it? As an example, there will be some months that you might struggle to collect the money that you’d like to invest as part of one of your goals. In such case this might create pressure on upcoming buying decisions. I.e.: does your partner really need to buy X for price Y? Having said that, having full consent for your partner will definitely help. Before you know it you’re having a 6-figure amount portfolio invested in the stock market. For me this is serious money and probably for your partner as well.
Now, without further ado, Let’s share how you can get started with dividend growth investing.
1. Read as much as you need to build confidence and understanding
I don’t know exactly how it works for you, but for me self-education typically starts with a search for great books, articles and websites about a certain topic that i’m interested in. I always consider that i’m not the first in this world trying to figure out something new, so there must have been some geniuses already gone through this experience that documented their knowledge. And guess what? We’re lucky 🍀! There exists already a vast amount of information that you can just read and learn from.
Having gone through this experience myself few years back, while still keeping an eye on what’s new out there, these would be some of my recommended picks for you to consider reading / studying if you’re just starting out:
- The Single Best Investment: Creating Wealth with Dividend Growth by Lowell Miller.
Note: great book that explains all the basics of dividend investing including simple metrics on how to evaluate whether a stock is worth considering.
- The Intelligent Investor by Benjamin Graham.
Note: very good book and by many people listed as a must-read to get started. I do agree with that, but please be warned, it can be quite dry reading and difficult at times. However, if you have been able to read the first one, then this is a great follow-up read.
- The Snowball: Warren Buffett and the Business of Life.
Note: I believe that Warren Buffett is deep inside of him a dividend growth investor. This book is a masterpiece effectively describing his whole life. Very inspirational including a lot of wisdom
- One Up On Wall Street: How To Use What You Already Know To Make Money In The Market.
Note: Interesting book which inspires to use common sense. It also introduces some basic metrics in layman terms that are useful when assessing a stock
- The Dividend Mantra Way: Achieving Financial Independence By Living Below Your Means And Investing In Dividend Growth Stocks.
Note: Jason Fieber was the person that inspired me a lot back in the day when I started. I was a frequent visitor of his blog, which he later sold for a decent amount of money and that allowed him a lot to speed up his early retirement. Having said that, he summed his experience quite well up in his eBook!
- The DRIP investing resource center.
Note: a great resource of information, but in particular you can find there the list with all US and European Dividend Champions. This has been for me a regular place to go to when scanning for new dividend growth stock investment opportunities.
Note: probably the best free source of information that you can find about any listed company. It has a lot of data for a stock which you might like to look-up when doing your own analysis, i.e. key (valuation) ratios, dividend per share for the last 10 years, income statements, balance sheet, cash-flow statements.
I would like to leave it with these 7 recommendations to avoid overwhelming you😉. There’s much more out there and if you’re interested, then feel free to get in touch with me so that I can recommend you some further readings. However, I do feel that this should get you started pretty well.
Having said that, I don’t believe that you will necessary wait until you have read everything, so let’s go already to the next step!
2. Open a brokerage account
When you’re pursuing a dividend growth strategy, then most-likely the following situation will apply to you:
- you will buy & hold the shares that you invest in. This means relatively few transactions per month
- you will receive dividends (i.e.: every month)
- you will want to reinvest all or some of those dividends
- you will need to pay taxes over your dividends
- you will invest in different markets (i.e. German, Dutch, France, Norwegian, US)
Therefore, when I started looking for a new brokerage account, the following criteria were important to me:
- low-cost transaction fees
- no additional costs charged for processing dividends
- low– or no costs for reinvesting dividends
- easy to download and easy to read transaction report
- automatic access to foreign markets without the need to submit written forms myself.
Another popular brokerage firm that I’m familiar with is Interactive Brokers*.
Good to know
– most of the brokers allow you to open up an account virtually and in a very easy manner. Sometimes even by just installing an app.
– you will typically need to transfer some money during the account opening process
– you might be asked to do a small financial literacy test to establish your risk profile.
– further in this post I’m assuming that you will know how to purchase shares by the great manuals and information your broker of choice will provide to you 😉
* I will earn a small commission when you open an account at DEGIRO or InteractiveBrokers. Creating an account is an easy way to support me covering the cost of maintaining this blog. PS: I would never recommend a product or service that I’m not familiar with or wouldn’t use myself.
3. Decide in what dividend growth stocks you want to invest
This is probably one of the more difficult steps as it comes to your first investment decisions to be made. In this case I would recommend to follow a fairly simple, yet conservative approach:
- Find stocks that meet the profile of dividend growth stocks. A good list to start with can be found at www.dripinvesting.org. It provides a link to both the US Dividend Aristocrats (25 years of dividend growth) and a link to the European Dividend Aristocrats (10 years of dividend growth or stable dividends). Another source for inspiration could be my own aspired portfolio which is referenced in my allocation strategy.
- Screen for stocks that suit your criteria. Check my latest article here.
- You should now have found a stock that successfully passed your screening criteria, so now it’s time to dive a bit deeper and truly analyze the company and its stock (those are not the same, a good company doesn’t automatically make it a good stock!). I do that typically by:
- Reading the latest annual report on the company’s website. I typically find them in the investor relations section. I also familiarize myself with the company by looking at their product & service offerings, market share, recent innovations, etc..
- Using my acquired knowledge after reading some of the books & online resources to analyze their latest quarterly financial statements. I check if there’s nothing weird in their numbers. As an example, I recently made a video about Unilever. Back in 2018 they sold their spread business which led to a spike in their earnings per share (EPS). Using a PE based on that number would have given me a wrong understanding of the true nature of their earnings quality.
- Running a Google search on the company and checking the news to see if there’s was any particular event that caused a negative impact on the stock. If so, I assess whether this event will have future earnings impact and therefore dividend impact. This is where it gets exciting, because the data might speak a really clear buy signal to me while anyone else is running for the fences. It requires a clear and cool mind to pull the trigger at such moment in time, but so far, such purchases have proven to be my best ever (i.e. Royal Dutch Shell at 17 Euro per share, Abbvie at 65 USD per share).
- Running a Youtube search by trying to find any recent interview with the CEO. This typically gives me a good impression about what person is leading this company.
This analysis takes time. Sometimes I know a lot about the company already, so in such case it’s a matter of hours. Companies that I’m not so familiar with can easily take several days or even weeks in duration before I truly understand what the company is about and whether it’s a good stock to purchase.
Having said that, if you’re convinced that you found the dividend growth stock that you’d like to buy, then let’s check how we can best do that!
4. Purchase shares
This is for me the most joyful moment! All the hard work should now lead to actually becoming an owner of the company. Just Imagine buying shares from a great company which employs 100.000 people. Isn’t it a nice thought 💭 that those 100.000 people are waking up every day to increase the value of their company which should both benefit themselves, but at the same time also benefit you as a shareholder by getting an share of their earnings? Well, let’s materialize those thoughts then!
Your first question will probably be:
OK, so how much should I buy now and when is the right time to buy?
My academic answer to it would be: it depends a lot on your own situation, i.e. how convinced are you and how much risk-tolerance do you have? If you don’t mind to risk losing all of your money and if you think that this is a once-in-a-life opportunity, then go ahead, pull the trigger and buy it all at once right now! 😎💪🖐
If you’re more like me (some doubts whether my assessment is right, scarcity of funds to invest, conservative by nature), then I would personally recommend to not buy all at once and use an approach of slowly averaging in. This means, buy for instance 25% of your full aspired stake now and repeat that on a monthly or quarterly basis until you have a full position. This allows you to benefit from any further dips later in time, but it also prevents you from purchasing too much all at once if the company would get in trouble and a subsequent heavy share price decline as a result.
Don’t feel bad when the stock will go down the next day. You simply can’t predict short-term pricing. Focus on the fundamentals of the stock and trust in your own research. There’s an old saying in the investors community which really fits well in this situation:
Time in the market beats timing the market.Ken Fisher
Regarding how much you should buy in total, depends on how much a “full position” should be for you and on your own situation. You know best how much dividend you would need to accumulate for early retirement and how much risk tolerance you have. In general a rule of thumb is that you would need around 10 stocks in your portfolio to benefit from diversification. Any additional amount of stocks have no meaningful impact on becoming more diversified from a risk point-of-view.
I honestly still don’t feel comfortable with that and I’m aiming for 40 stocks. If you feel the same about it and if you need some inspiration, then I would recommend to have a look at my own allocation strategy. As you can see, a stock in my portfolio would have maximum 4% of total exposure in my portfolio once I have got my whole aspired portfolio in place. This does mean however that during the accumulation phase I typically have some stocks that are above that threshold, because other positions where not created yet due to for instance lack of buying opportunities.
To summarize this, I often use a simple “rule of thumb” formula to quickly count how much I need to invest:
- Envisioned cost of living at retirement / (envisioned Dividend Yield at time of retirement (i.e. 3.5%) * 100) = Value of total required portfolio
- % of aspired stock position / value of total required portfolio = value of total stock position
How does this look in real life? Let’s assume that you will need 30.000 Euro per year to live happy, a bit frugal, but with the ability to cover your expenses. In that case you would need an approx portfolio of 857.000 Euro. If your aspired position size for a given stock is 4%, then you would need to build up a position of approx 34.000 Euro. Now, it can become a bit tricky here. If you’re still 10 years out from retirement then you will benefit from share price appreciation and dividend growth, so you might assume in such case purchasing about 20K and for the rest let it grow over the next decade.
For the purpose of this post, I’m trying to keep it simple ;-). You can then either divide the value of total stock position by 4 and buy it at 4 moments in time over for instance the next quarters. Or, as an alternative (what probably most of us do): look at our monthly funds available for investing and use that to start accumulating the stock.
Having said all of this, by now you should know how many shares you would like to buy in your first “tranche” to initiate a position and what your plan going forward is for purchasing additional shares. 🎉🎈
In my personal experience, purchasing shares itself is not difficult. You can often do this with just a single click of the button. What takes time and an effort is self-education and stock research.
I personally enjoy it a lot, but if you don’t have the time or if you don’t have the passion to do it yourself, then just know that there are also some interesting ETF’s available with low-cost maintenance fees. For instance at Vanguard (ticker-symbol $VIG) or iShares (ticker-symbol $DGRO)*. These could be great alternatives to get started.
Personally I found my passion in doing it myself, so I’m rather sticking with individual stock picks 🙂
* Check first whether your broker provides access to purchasing those ETF’s. This is not always the case!
I truly hope that you found this post useful!
Feel free to ask any further question via the comment section or get in touch with me directly via email. I’m looking forward for your comments, feedback and suggestions! 🙏
– I own shares from $RDSA, $ABBV
– This post includes affiliate links, and I will earn a small commission if you purchase through these links. Please note that I’ve linked to the books purely because I recommend them and I stand behind them. There is no extra cost to you when you purchase through my links.