Dear DTA,
I would like help with wealth preservation and achieving positive returns on existing investments. I would also like to learn about new opportunities to create additional wealth.
-Barry M.
Hi, Barry. Thanks for writing in. Your readership is very much appreciated.
Preserving and growing wealth is, of course, a goal for every investor out there. The whole point of investing is to earn a return on risked capital.
But how one goes about earning that return, and how much risk is taken, is ultimately an individual call.
The most logical way to think about investing, in my view, is to maximize the former while simultaneously minimizing the latter.
You want the greatest possible return while taking on the least possible amount of risk.
Meanwhile, the return side of the equation – total return – is made up of both capital gain and income (dividends or distributions).
Thinking about things logically once more, it makes a lot of sense to focus on income.
While stock prices go up and down (adding and subtracting capital gain in the process), income can be and very often is far more stable.
And since most investors want to eventually become financially independent (so that investment income can pay their bills), the most straightforward way to approach investing is to concentrate on tangible and passive cash flow.
After all, we pay our bills with cash flow. Capital gain will affect our net worth. But we don’t go down to the net worth store and buy stuff with our net worth. We need cash flow to sustain ourselves, which is why most of us hold down jobs (for the paychecks).
Well, one of the best sources of passive cash flow out there is dividend income.
Not only is this source of passive cash flow complementary to preserving and growing wealth, but it also works hand-in-hand with achieving financial independence.
Better yet, many of the best dividend payers out there also increase their dividend payments year in and year out, meaning your passive dividend income is growing regularly – increasing your purchasing power in the process.
These stocks are known as dividend growth stocks.
Dividend growth stocks are stocks that represent equity in businesses that are paying increasing dividends to their shareholders. They can increase their dividends regularly and routinely because the underlying businesses are increasing their profit by selling more products and/or services to people all over the world.
As you can probably surmise, some of the highest-quality dividend growth stocks out there are also blue-chip stocks.
You can find more than 800 US-listed dividend growth stocks by perusing through David Fish’s Dividend Champions, Contenders, and Challengers list.
Mr. Fish’s CCC list in an invaluable compilation of US-listed stocks that have paid increasing dividends for at least the last five consecutive years.
You’ll notice many household names on this list.
Stocks like Apple Inc. (AAPL), Nike Inc. (NKE), McDonald’s Corporation (MCD), Johnson & Johnson (JNJ), and AT&T Inc. (T) are all on that list.
All of these aforementioned businesses are pretty easy to understand, making investing in them fairly straightforward.
All of those stocks pay dividends. And all of those stocks have measurable track records of increasing their dividends regularly and routinely.
In addition, they have excellent track records of preserving and growing their shareholders’ wealth.
So you get to quite literally have your cake and eat it, too.
You get the growing wealth that occurs as your share in these businesses become worth more, which occurs as the underlying companies sell more products and/or services to more people all over the world, all while simultaneously (in most cases) raising their prices over time.
McDonald’s, for instance, sells a lot more Big Macs today than it did 20 years ago. Furthermore, a Big Mac costs a lot more than it did 20 years ago. That’s more units at a higher price per unit. As such, McDonald’s earns a much higher profit than it did 20 years ago, making the business (and each share in the business) worth a lot more.
That’s wealth preservation and growth.
But it gets better.
As McDonald’s sells more Big Macs (and other products, of course) to more people, at higher prices, their profit grows. And as their profit grows, they increase their dividends to their shareholders, because dividends are simply a return of profit to the owners (the shareholders).
That’s passive and growing cash flow.
It’s this one-two punch that makes dividend growth investing such an appealing long-term investment strategy.
Of course, I don’t just talk the talk. I’m not just writing about this stuff. I walk the walk.
I’ve personally been investing my hard-earned capital into high-quality dividend growth stocks since 2010, building the real-life dividend growth stock portfolio that I control.
This six-figure portfolio generates five-figure passive and growing dividend income on my behalf, rendering me financially independent in my 30s.
If this strikes you as a logical way of growing your wealth and passive cash flow (as much as it strikes me as logical), I’d recommend reading through Dave Van Knapp’s lessons on dividend growth investing, which is a series of articles that discuss the dividend growth investment strategy with depth and detail.
The resources don’t stop there, though.
I also personally highlight an undervalued dividend growth stock every Sunday, as part of a longstanding series of articles where I present a compelling long-term dividend growth investment idea to the community every week.
You have some fantastic tools at your disposal here, Barry.
But it’s up to you to take advantage.
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.