Reader Mailbag: “I want to start building a dividend growth portfolio…”

Dear DTA,

I transferred over $170,000 from my government retirement account to a well-known mutual fund, where I have already lost money. How can I find the best online brokerage? I want to start building a dividend growth portfolio. I want to move my hard-saved money to an account that will allow for future growth. I am retired now and need growing income.

-Amanda B.

Hi, Amanda.

Thanks so much for writing in. It’s great to hear from you.

We care deeply about our readers’ success and wealth, and it’s why we produce high-quality and high-value content. It’s also why we’re taking the time to reach out to you today.

First, I’m sorry to hear about your experience with the mutual fund.

Mutual funds have a bad reputation for charging sky-high fees while simultaneously delivering below-market results.

This isn’t true for every mutual fund. But there’s enough there to make something out of it.

You say you now want to move your money, open a brokerage account, and build a dividend growth stock portfolio.

Well, you’re talking to the right guy!

That’s exactly what I did back in early 2010.

I was almost 28 years old back then. And I was broke. Actually, I was worse than broke. I was in the hole. My net worth was below $0 due to liabilities outstripping assets.

It’s hard to be below broke, yet I made it look easy.

By living a typical American lifestyle (one which prioritizes spending over saving, requiring ongoing work in order to earn and spend more), I fell into the same trap that my peers found themselves caught up in.

But I knew I could do better.

I envisioned a future me who was financially independent, earning enough passive income to be free and live the life of his dreams.

I saw this future me… clear as day.

But it’s one thing to give birth to an idea. It’s quite another thing to execute the necessary steps in order to make a dream your reality. 

You’re in the idea stage. You know what you want. You now just have to execute.

I think I can help.

See, I used dividend growth investing to go from broke in 2010 to financially independent in 2016. 

That’s right.

Just six years.

Broke to free.

The real-money and real-life dividend growth stock portfolio I built throughout this process now generates the five-figure passive dividend income I need to pay for my basic expenses in life – basic expenses like rent, food, transportation, etc.

As you can imagine by now, you’d have a hard time finding a more enthusiastic advocate of dividend growth investing than myself.

But the great thing about this is, just about anyone can do this.

That’s an aspect of this investing strategy that’s so delightful.

Many companies that have a longstanding track record of paying shareholders growing dividends, have that track record in place precisely because they’re wonderful businesses that are incredibly adept at increasing profit.

After all, you can’t continually write larger checks if you don’t also have the ever-larger cash to back those checks.

In addition these companies are also the lifeblood of the global economy.

They provide the products and/or services that make the world go ’round.

And so they tend to be businesses that even a child can understand.

Many dividend growth stocks are blue-chip stocks precisely because of all of this.

This means that dividend growth investing is essentially akin to investing in easy-to-understand, wonderful, and highly-successful businesses that should continue to prosper.

Look through David Fish’s Dividend Champions, Contenders, and Challengers list to see what I mean.

Mr. Fish has compiled invaluable information on more than 800 US-listed stocks that have paid increasing dividends for at least the last five consecutive years.

That list will reveal many businesses that are exemplary.

Take Procter & Gamble Co. (PG), for example.

This is a classic blue-chip stock. It’s also a dividend growth stock.

This company has paid an increasing dividend for 61 consecutive years.

Just think about the kind of consistency a business has to have in order to make that happen. And then think about the types of products and/or services a business has to provide the world.

That 61-year streak stretches right through multiple wars, numerous US presidencies, several stock market crashes, 9/11, and even the recent Great Recession.

We see the consistency.

And that consistency is largely possible because Procter & Gamble is a wonderful business that sells necessary basic goods like diapers, tissue paper, detergent, and personal grooming supplies.

Is the world going to need less diapers or detergent tomorrow? 

Unlikely.

Is it hard to understand how Procter & Gamble makes money and affords its rising dividend payments?

Not particularly.

Is this the type of business that just about anyone can invest in, profit from, and earn a growing stream of passive dividend income through?

Most certainly.

These are just a few reasons I’m a shareholder. This also illustrates why I’m an advocate – and personal beneficiary – of dividend growth investing as a long-term investment strategy.

If you can build a dividend growth stock portfolio large and diversified enough, you can set yourself up for life-changing passive dividend income. 

Better yet, because of the very nature of these companies, you can pretty much count on that passive dividend income to increase year in and year out!

You’re retired and need growing income.

Well, you’re $170,000 portfolio could be invested (assuming just a 4% yield across the portfolio) in a way that could earn $6,800 in annual dividend income… that should grow, faster than US inflation, organically (all by itself).

That’s a nice chunk of change.

And that 4% yield is somewhat conservative.

If you tilted the portfolio heavier toward utilities, telecoms, and real estate investment trusts (arguably riskier), you could boost the portfolio’s yield to 5% or more.

A 5% yield would boost the annual passive dividend income on a $170,000 portfolio to $8,500.

And that money, too, should grow organically, almost like clockwork (albeit likely at a slower rate, due to the higher yield).

However, I noted earlier that it’s easy to give birth to an idea. It’s harder to execute the steps necessary to make a dream your reality.

So it’s now up to you to execute.

But we have you covered with plenty of content and resources that may make this task much, much easier.

Fellow contributor Dave Van Knapp authored a great series of articles that discuss dividend growth investing from beginning to end. These “dividend growth investing lessons” can teach novice and experienced investors alike just about everything they’d want to know about the strategy.

And I personally highlight what looks like a compelling and undervalued long-term dividend growth stock investment idea, every Sunday, via the Undervalued Dividend Growth Stock of the Week series.

As for the “best” online brokerage, it’s really up to you. Most of the major brokerages in the US are similar in terms of features, pricing, and platforms. But it would probably behoove you to call around and see which one will give you the best terms (especially considering the capital/asset base you can transfer over).

It sounds like you’re in a great position, Amanda.

But your position could be even better.

It’s up to you to make that happen, though.

And there’s no better time than today to get started. 

I wish you luck and success.

Jason Fieber

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Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.