Dividend growth investing, like any investment approach, is a journey. It can feel frustrating at times or deeply rewarding, depending on how you refine your decision-making along the way. A mindset of continuous improvement – built through regular retrospectives, like my annual report – helps identify areas for growth and take corrective actions. Over time, I truly believe that this process reduces mistakes and strengthens the power of compounding.

With that in mind, I truly relate to what Uncle Warren once said:

In other words, it’s about minimizing mistakes while accepting that they can never be completely avoided. My approach is to learn from each mistake and improving my ability to spot potential errors before they happen – ultimately lowering the chances of repeating them.

With that in mind, let’s look into the key learnings that I took from the analysis behind this year’s annual report:

• Dividend Growth was below target – Organic dividend growth was 4.5%, thus below the 6% target. Some holdings, such as Bayer, cut dividends, and others showed slow growth, impacting overall performance. In the current environment of high valuations, is 3.25% average yield in combination with 6% growth really the right goal or does it pull me into a pool of value-traps?
• Portfolio Adjustments improved dividend safety – Proactively reducing positions in risky dividend stocks (e.g., 3M and Enagas) and reinvesting into safer, high-yield alternatives (e.g., NN Group and ASR Nederland) led to better overall dividend stability.
• Savings Rate was lower due to certain lifestyle choices – The purchase of a new car and increased vacation spending resulted in a lower savings rate of 35.5% (compared to the 50% goal). While this was a conscious choice, it impacted new investments.
• Turnaround Investing was costly – Investments in struggling companies (e.g., Bayer and Intel) led to capital losses and dividend instability. Turnaround plays have been more of a drag than a benefit.
• Psychological and Financial Freedom are within reach – With a 72.41% dividend-expense coverage, full financial independence could be achieved by 2026, if I prioritize this the right way. This brings significant lifestyle questions regarding work, purpose, and security.

Make no mistake, I was very satisfied with my year, because having a 70%+ FI rate is getting me very close, but like I mentioned, I want to continue strengthening my portfolio and my dividend growth returns.

So taking the above learnings into account, I want to focus on the following goals for 2025:

1. Improve the portfolio mix

Inspired by The Income Factory book, I want to acknowledge that some of my holdings are primarily high-income investments, where dividends are expected to account for most of the return. With that in mind, I aim for the following mix:

In terms of income:

• 85% dividend income from dividend growth companies
• 15% dividend income from income factory stocks

In terms of portfolio value:

• 85% in dividend growth stocks
• 10% in income factory stocks
• 5% in growth stocks (non dividend payers)

At this stage, I’m not too far off from that target, but there is room to slightly increase my exposure to Income Factory stocks (or CEFs) by a few percentage points. Additionally, I have some flexibility to add growth stocks if the right opportunity arises.

Within my portfolio, I’ve classified the following stocks as Income Factory stocks:

What they have in common is a dividend yield of at least 6%, along with some potential for dividend growth. However, my expectations remain modest, as I anticipate slow growth and, in some cases, cyclical fluctuations – particularly for stocks like BHP and Rio Tinto.

2. Remove stocks with unsafe dividends

This is particularly relevant for the 85% of my portfolio allocated to dividend growth stocks. Using our Dividend Talk Premium service (get access to free samples here), I plan to eliminate any holdings with questionable dividend safety ratings and reallocate the funds into existing positions or new opportunities. With over 50 stocks already in my portfolio, there is no real need to add new positions.

As for the high-income portion, I will conduct further due diligence to assess potential risks. At first glance, I see some elevated risk with Omega Healthcare, but nothing that keeps me up at night. It’s not setting off alarm bells the way Medical Properties Trust did last year (which, fortunately, I never owned).

3. Don’t add Turnarounds

First, I will exit any remaining positions in turnaround stocks like Intel and Bayer. Most of these were already sold for tax-loss harvesting, but I kept a small portion to offset potential option income in 2025.

Going forward, I have refined my definition of a turnaround stock:

A turnaround is any company facing an existential external threat that could significantly impact its ability to generate meaningful profits or remain solvent.

A key example is companies faced with litigation where the downside risk is effectively unlimited. This was my concern with Bayer due to the RoundUp lawsuits and with 3M over PFAS liabilities. However, this does not apply to Johnson & Johnson, which maintains a pristine AAA-rated balance sheet.

Another example includes businesses operating in winner-takes-all industries that require years and massive CAPEX to regain lost market share. Intel fits this definition perfectly, given the capital-intensive nature of the semiconductor industry.

On the other hand, slow-compounding companies experiencing temporary sales headwinds due to management decisions or market dynamics are not turnarounds for me (even if managements or analysts use this term. In my opinion, they overuse this term for any change a company is making).

Nike and Starbucks fall into this category – they may face challenges, but their earnings won’t evaporate within a few quarters, nor do they require heavy CAPEX to recover. In my view, these companies have reached the top of an S-curve, where future growth depends on innovation and an evolving product mix.

Of course, I will monitor such companies more closely, but this pattern is natural in business. Even Microsoft will likely face similar pressures once its cloud revenue matures and starts to plateau. However, the advantage of slow compounders is that their business models are difficult to replicate, and it takes years – if not decades – for competitors to claim significant market share.

4. Prepare for Financial Independence

Seeing the finish line in the distance, just two to three years away, means it’s time to start proper preparation. Questions I will ask myself in the coming months include:

• Do I want a margin of safety on my dividend income and if so, how much?
• Shall I prioritize paying down the mortgage to zero as an additional margin-of-safety?
• Is there any big costly desire which I would like to fulfil in the upcoming 5 years that requires a significant investment and which goes beyond my regular annual costs?
• How much emergency fund would I feel comfortable with?
• Would I want to stop working from one day or another or will I take a more gradual approach?

I don’t have answers to these questions yet, and they will require some good discussions with my other half. It’s possible that some of the answers may push back my early retirement plans, and that’s OK. I’m not in a hurry, and I’m pretty satisfied with the life I have today.

Being at this stage of the journey has already made me feel mentally free. If I were to lose my job today, I’d find a way to fill the ~30% gap relatively easily.

That said, if you are already early retired and you recognize some of these questions that I’m asking myself, then please don’t hesitate to share your insights with me in the comment section. I’m eager to learn more from others about this.

5. Dividend Yield and Dividend Growth goal

It’s important to look at the performance I had over the years and it’s clear that it’s been very hard to reach my goals in a zero-interest environment or in the current environment where the stock markets are trading around historic highs.

My current thinking is to focus on the combination of both factors: a 3.25% yield at cost when investing, along with a 6% average dividend growth, which together provide a 9.25% return. For 2025, my goal will be to reach this combination of 9%+ returns, though the mix could vary. For example, it could be a yield on cost of 4.5% combined with an average annual organic dividend growth of 4.5%.

I believe this goal would be more realistic in the current environment, without sacrificing my target for a 9%+ return, which is crucial for the success of my dividend growth investment journey.

6. Savings Rate

It’s quite simple: I aim to achieve a 50% savings rate. It should be possible without missing out on opportunities to have meaningful life experiences with my family. We’re in a fortunate position where we can afford to travel abroad a few times without jeopardizing our savings rate.

The benefit of having no debt obligations, aside from a low mortgage, makes this more achievable.

Closing out

Six goals may sound like a lot, but I feel they’re quite reasonable for my personal situation. I do need to make a few portfolio adjustments to strengthen the setup, but there’s no need to rush. Aside from that, these are goals that are achievable based on the behavioral patterns I’ve already developed. The most difficult one for me might be staying away from turnarounds. I’ve recognized this urge within myself, and I need to work on suppressing it early on and practicing the joy of missing out as much as possible.

That’s it from my side. I hope that by sharing my goals, I’ve offered some transparency into how I approach my journey, and at the same time, I hope you find it insightful and maybe even inspiring.

Make no mistake, though: each of our journeys is different, and I may go too far at times. It’s not intended to make you feel bad or suggest that you’re doing something wrong by not having these kinds of goals. I noticed this when I released my annual report – it might have seemed like I was implying that not doing an annual report is somehow bad. That’s not the case. You simply need to figure out what works for you so you can achieve whatever you aspire to.

Wishing you lots of investing success in 2025!

Yours Truly,

European Dividend Growth Investor.