Dear DTA,
I’d like to live good now, but I also want to plan for retirement.
-Jenny T.
Hi there, Jenny. Thanks so much for writing in. It’s great to hear from readers like yourself.
I don’t know your age. I don’t know your income.
And I don’t know what you’re already working with in terms of assets.
However, the information I’m going to give you today can work for investors of all ages, regardless of their income and wealth.
Moreover, it can allow one the flexibility to improve/increase their lifestyle options today while still providing for a better and more financially secure retirement down the road.
The investment strategy that can potentially allow for this kind of flexibility is dividend growth investing.
It’s the strategy I personally used to reach financial freedom in my early 30s, which gives my lifestyle a huge boost today while simultaneously allowing for a far more enriched “traditional” retirement in 30 or so years.
Indeed, the real-life, real-money dividend growth stock portfolio I’ve built generates five-figure passive dividend income on my behalf.
This dividend income pays my bills just as well as any paycheck I ever received from a day job.
In fact, dividend income is better than a paycheck in a lot of ways.
First, it’s far more diverse.
I have more than 100 of the world’s best businesses regularly paying me a portion of their profit. If one business has trouble, and their dividend is negatively affected, my overall income isn’t hurt too much. Compare that to the company you work for having to cut its workforce. If you lose your job, you’re out 100% of your income.
Second, it’s far more secure.
While your employer can fire you almost at will in most states, companies can’t fire shareholders.
Third, the income growth is potentially much better.
I used to be lucky if I got a 3% raise at work, back when I had a job. And that was only after begging for it. Conversely, many high-quality dividend growth stocks are increasing their dividends by over 7% every year, and they’ve been doing this, in many cases, for decades.
Dividend growth investing basically involves buying shares in wonderful businesses that share some of their growing profit directly with their shareholders via growing dividends.
Some of the most well-known blue-chip stocks in the world are also dividend growth stocks.
That’s because it’s natural for a great company to regularly register more profit year in and year out. And it’s also natural that shareholders should expect their fair share of that – shareholders are the collective owners of any publicly traded company. Likewise, it’s natural that as profit grows, so should those dividends.
I’ll give a few examples: McDonald’s Corporation (MCD), Johnson & Johnson (JNJ), and 3M Co (MMM).
Blue-chip stocks that are also dividend growth stocks.
McDonald’s has increased its dividend for 41 consecutive years. Johnson & Johnson has done so for 55 consecutive years. 3M has paid an increasing dividend for 59 consecutive years.
Just try getting a 7%+ annual raise at work for 40 straight years!
You can find more than 800 US-listed dividend growth stocks on David Fish’s Dividend Champions, Contenders, and Challengers list, which is the best compilation of such stocks out there.
See, this strategy is great because it allows for both growing income and growing wealth.
Furthermore, that growing income can be used to pay bills both now and later.
That leads me back to my initial point about having the flexibility to improve your lifestyle today and tomorrow.
You can improve financial security and flexibility in your life today, while still planning for a better retirement tomorrow.
High-quality dividend growth stocks naturally increase in value over time as the underlying business increases in value. As a business sells more products and/or services to more people, its profit increases in turn. And as profit grows, the value of the business improves.
So there’s increasing wealth for you. When you buy shares in these businesses, you should see your wealth grow over time as this process plays out.
And as that profit grows, the dividend income should, too.
That growing dividend income, if set up in a taxable account, can be spent at will.
As noted earlier, I’m collecting five-figure dividend income right now.
That has a major impact on my financial security today.
But it will almost surely have an even bigger impact in 20 or 30 years as that income continues to grow all by itself (via the dividend increases that are regularly occurring from the 100+ businesses I’m invested in).
So if I wanted to, I could just spend all of that passive income on whatever I want, while also having retirement planning already kind of “locked in”, as the wealth and income grows without much further input on my part.
As you can probably see, this strategy is incredibly robust and tangible.
But high-quality dividend growth stocks won’t buy themselves. And you can’t invest with money you don’t have.
That’s why it’s important to make sure you manage your overall finances and lifestyle properly.
In order for me to build the portfolio you now see, I had to budget and live below my means.
There were a lot of lifestyle changes I had to make.
Of course, I had to be a bit more aggressive than most people, as I built much of this portfolio inside of seven years, while spending much of that time averaging only $50,000 per year at a car dealership.
See, I had a very middle-class job with a very middle-class income.
But I can tell you this: I now have flexibility, options, and financial security that are all very much beyond most middle-class workers of my age.
A little short-term pain is almost always worth the long-term gain.
What you do next is up to you, Jenny.
But I’d strongly recommend reading through fellow contributor Dave Van Knapp’s dividend growth investing lessons, which is a collection of articles that essentially read like a book.
These articles are designed to educate even novice investors on how dividend growth investing works, why it’s such a great long-term strategy, and how to successfully use it to your advantage.
And then once you’re ready to actually invest capital, I write an article very Sunday that highlights an undervalued high-quality dividend growth stock for that week.
You have some fantastic tools and resources at your disposal.
However, even great businesses require time to work in your favor and get your wealth and income moving in the right direction.
That’s why the best time to start saving and investing is always as soon as possible.
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.