With an infant, a toddler, and a wife who works remotely for a start-up company located in California, my work/life/sleep schedule is fairly odd.
I tend to hang out with the kids during the afternoon/evening while my wife is working, then stay up late into the night doing my work, and then sleep for a bit during the typical morning hours on the east coast, until it’s time for my wife’s west coast work day to begin.
The last thing that I do each day before I go to bed is check the pre-market futures, to get a sense of where the major averages will open up (if it’s looking like we’ll see a lot of volatility, my “nightly” rest becomes a nap or sorts because I set my alarm to coincide with the market’s open).
Thankfully, I don’t feel the need to do this all that often (my wife knows to wake me up if something crazy occurs in the financial world). But last night was one of those days…
Around 4 am when I was headed to bed, I noticed that the Dow Jones Industrial average was down 750 points or so. That woke me back up and I quickly got up to speed on the new COVID variant and what it might mean for the markets in the coming days/weeks.
All of the headlines that I saw were pretty scary.
There was fear that the current suite of vaccines might not work against the new virus which has upwards of 50 mutations. The same thing was being written about the newly developed therapeutics.
For months, I’d been operating on the belief that we were in the final innings of the COVID-19 pandemic.
I’d read reports by well respected scientists who believed that the Delta variant would be the best major wave of COVID due to its ability to out compete its COVID-peers. Well, as it turns out, this new B.1.1.529 variant appears to be beating Delta in South Africa.
Fear is the market was based on the idea that we may experience a major setback in the global pandemic recovery. This isn’t what anyone wanted to hear. And yet, while I went to get concerned about the welfare of loved ones, I wasn’t stressed about my position financially.
Why? Because of the defensive nature of my portfolio and the proven success and reliable compounding that the dividend growth strategy has been able to produce for me throughout a myriad of economic environments in the past.
And being that yesterday was Thanksgiving, I decided to use this sense of financial solace that I experienced this morning as the inspiration for this week’s Durable Dividends article.
Thanksgiving is all about taking the time to reflect upon and be grateful for our blessings. In this piece, I’ll highlight the major aspects of the dividend growth strategy that I’m so thankful for.
I Get To Own The Very Best Companies In The World
One of the primary reasons that I sleep peacefully with my dividend growth portfolio is because it’s chock full of the very best companies on Earth.
This is not a coincidence.
For a company to have the wherewithal to pay out a reliably increasing dividend over the long-term, it must generate reliably increasing fundamentals. Otherwise, a rising dividend wouldn’t be sustainable and the house of cards would eventually implode.
The operational success involved with generating rising sales, earnings, and cash flows required to pay out a reliably increasing dividend over the long-term tends to result in a virtuous cycle.
Rising sales tend to generate brand awareness and increasing brand value. Over time, this helps to contribute towards strong pricing power.
Strong market positions and pricing power gains implies margin expansion.
Strong margins equate to strong cash flows, which allow companies to invest heavily into research and development as well as fight off potential competition via mergers and acquisitions.
And most importantly, things like valuable brands, strong cash flows, enviable market share positions, and perceptions of future growth allow blue chip companies to attract top talent. The top-notch human capital that best-in-breed companies tend to amass is what allows them to compete so well against potentially disruptive peers.
The fact is, no one can predict the future. But, I believe that excellence never happens by accident and therefore, I always want to be partnered with winners in the stock market.
Generally speaking, winning is contagious, even at the corporate level, and as a shareholder, I want exposure to the corporate cultures that generate reliable results.
Barring some sort of total economic collapse, I have a high degree of confidence that the best-in-breed names that I’m investing in today will stand the test of time.
Sure, consumer tastes will change. The competitive environments that companies from every sector and industry operate in will evolve over time. But, winners tend to win and if I had to guess, the vast majority of blue chip companies that have been able to weather the numerous storms that we’ve seen throughout the last several decades, while still providing consistent dividend growth to their shareholders, will continue to navigate the uncertain future and generously reward shareholders with a reliably increasing passive income stream.
I Don’t Have To Worry About Short-Term Share Price Volatility
I write about this often, but I think it’s important to note in an article like this: because of my focus on passive income, I don’t have to worry about short-term share price volatility.
Share price movement in the short-term is largely irrational. It’s driven by fear and greed. And I thank my lucky stars every night that my success in the markets does not involve attempting to time the emotional rollercoaster that stock prices are on in the short-term.
My strategy is a simple one: accumulate shares of the highest quality dividend growth stocks that I can find trading at fair value (or better).
Then, once I own these positions, so long as the companies appear to offer safe dividends with sustainable dividend growth prospects, my response is easy: do nothing.
I just sit back, hold the shares, collect the dividends, and use them to continue to accumulate shares of blue chip dividend growth stocks.
My focus on passive income means that I look past share price movement and only focus on fundamentals.
The fundamental data that companies produce paints a fairly clear picture, with regard to their health.
This data is fairly objective and therefore, it makes it easy to ignore the fickle price movements that I see on a daily basis.
Furthermore, once I’ve established the belief that a company’s operations are in good order and that its dividend is safe and likely to grow…well then I actually root for share price weakness.
Lower share prices mean that I’m able to accumulate shares with a higher yield on cost.
Lower share prices also mean that the limited amount of investable capital that I’m working with (unfortunately, the trees in my yard don’t grow money) can purchase more shares.
A higher share count with a higher yield on cost means that I’m able to use dips in the market to augment my passive income stream.
In short, dividend growth investors like me don’t have to fear sell-offs. On the contrary, they’re to be viewed as attractive opportunities to accelerate the compounding process and ultimately, my journey along the way towards financial freedom.
I’m Able To Quickly and Easily Measure Success In The Markets
Along very similar lines to ignoring short-term share price movements, one of my favorite things about the dividend growth strategy is that it’s easy to measure success.
The tangible nature of dividends is great. While I don’t use my passive income stream to support my lifestyle’s expenses at the moment, I can easily compare my passive income stream to all of the bills that I have to pay every month to see just how close to financial freedom I am.
What’s more, due to the fairly reliable and predictable nature of dividend growth (especially on a relative basis to share price movements) I can model the compounding process out into the future to see just how far I have to go and how long it will likely take me to get there.
Share price charts are volatile. They’re full of jagged peaks and troughs. Bulls and bears are in a constant tug-of-war match and therefore, someone relying solely on the value of their holdings to dictate success in the markets is likely to be in for a wild ride.
Well, that isn’t the case for my portfolio.
Below is the chart in which I track my monthly dividend totals. I started this spreadsheet roughly 8 years ago and as you can see, the trajectory of my passive income stream is clearly trending in a positive direction.
What’s more, as time moves on, the trend line is beginning to form the beginnings of a positive exponential curve. Such is the power of the compounding process associated with dividend growth.
To me, dividends are a tangible measurement of financial success and frankly, I can’t imagine the stress and anxiety that would come along with having to rely on buying and selling shares to fund a retirement as opposed to simply collecting the passive income that my holdings produce.
I Don’t Have To Fear Running Out Of Money In Retirement
Honestly, this is one of the things that I’m most thankful for with regard to the dividend growth strategy.
I’m happy that I’m able to model my compounding process and have a fairly good idea of when I can expect to be financially free. But, more importantly, I rest easily knowing that once this occurs, I will likely stay that way.
Why? Because the dividend growth strategy means that I’ll be living off of my passive income and won’t have to abide by the classic “4% rule” which dictates that retirees liquidate assets to fund their retirement.
I hated the idea of working hard for my entire life and building a nest egg…only to see it dwindle away as I sold shares to pay bills once I no longer had an active income stream. This is what inspired me to initially pursue the dividend growth strategy.
As a strict value investor, I especially hated the idea of being forced to sell equities into weakness during retirement to fund my lifestyle. Simply put, a deep recession can drastically change a retiree’s plans if they’re beholden to the 4% rule (or something similar). But, as a dividend growth investor, so long as my passive income stream exceeds my lifestyle’s spending needs, I’ll never be a forced seller.
What’s more,in retirement the passive income stream that my dividend growth stocks produce should continue to grow. Even though I’ll no longer be re-investing my dividends, the organic annual increases that the companies provide should protect my purchasing power from being eroded away by inflation.
This provides peace of mind because I’d hate to be in a situation where I had to sacrifice the quality of my life in retirement because of fears of running out of resources. I’d hate to be a burden to loved ones, or even society as a whole. And this is a perfect segue into the final thing that I’m thankful for today…
The Opportunity To Pass Along A Lasting Financial Legacy
When I’m laying on my deathbed, I have to believe that I’ll feel good knowing that all of the hard work that I’ve done throughout my life will continue to benefit my offspring (or charities, if they have not behaved) long after my time on Earth is through.
Thoughts of mortality generally aren’t fun; however, I do find solace in the fact that future generations of Wards will be able to benefit from my portfolio.
The portfolio management decisions that I’m making today (and will continue to make far into the future) aren’t just about me and my happiness in retirement. They’re about building generational wealth.
The dividend income stream that the blue chip stocks that I own generate isn’t going to magically shut off just because I’ve died. The world will keep spinning without me and if I have to guess, dividends will keep growing as well.
As a father, everything I do is to ensure that my children are able to have a better life than I did.
And if my wife outlives me, I want to make sure that she’s well taken care of too.
I plan to teach my kids about the dividend growth strategy, highlighting the benefits of long-term compounding at a fairly early age, so that they will be able to take over management of the passive income machine that I’m building.
I’m thankful that I’m (hopefully) putting them in a situation where they can be financially free at an early age and be able to pursue their passions in life.
Honestly, this is probably the aspect of owning blue chip dividend growth stocks that puts the biggest smile of all on my face.
Nicholas Ward is a research analyst who currently writes for Seeking Alpha, The Dividend Kings, iREIT, and Forbes Real Estate Investor. Before that, he was Founder and Editor-in-Chief of The Dividend Growth Club, as well as the Income Minded Millennial. Nicholas has also contributed to Sure Dividend, Investing Daily, and The Street, where he covered stocks in Jim Cramer's Action Alerts PLUS Portfolio.
Nicholas holds a bachelor of arts from The University of Virginia, where he studied English and studio art. Prior to transitioning into the financial industry, he managed a vineyard in the foothills of the Blue Ridge Mountains.
