The First Rule of Dividend Investing
These are typically well known businesses with:
· Long dividend histories
· A seasoned management team
· A strong balance sheet
· And proven products.
The first rule of dividend investing is to buy only high quality dividend growth stocks. This is the quality rule.
“As Graham, Dodd and Buffett have all said, you should always remember that you don't have to swing at every pitch. You can wait for opportunities that fit your criteria and if you don't find them, patiently wait. Deciding not to act is still a decision.” -- Seth Klarman
Seth Klarman is an American billionaire, hedge fund manager, author and proponent of value investing.
Value investing focuses on buying quality undervalued stocks of strong companies and holding them over a long period of time.
It is actually very easy to invest in high quality companies that have a proven long-term record of stability, growth, and profitability. Simply use the payment of increasing dividends over an extended period of time to find the few quality stocks you want to invest in.
Right now there are only 65 stocks that have paid an increasing dividend every year for 25 years and are large enough to be included in the S&P 500 index. Only eight of these stocks are a part of Dow Jones list of 30 stocks (The ones you hear about on the news each night when the reports takes about the stock market going up or down.).
It is simple to find these stocks, because they are typically well known producing products you likely use. These companies include insurance companies like Aflac; consumer goods companies like Colgate and Procter and Gamble; utilities like Consolidate Edison and retailers like Target and WalMart.
By investing is quality companies who ensure that the dividend payout is consistent (or even increase) year after year you have focused on quality.
Fortunately for beginners, the universe of these stocks is rather small at less than a hundred stocks. So already we have made it simple to invest by using a quality screen to narrow down your options from thousands of stocks to less than 100.
By comparing the stocks in the Dow index to the list of stocks with a strong history of paying increasing dividends you get a limited list of less than ten companies.
Right about now you might be thinking, “I can’t afford even one stock, let alone ten”. It is not
uncommon to think you can’t get started because stock investing requires lot of money to start investing, but the truth is you can do it for as little as $10 per month.
One of American’s oldest, well run companies, 3M allows the average guy (like you and me) to buy fractional shares of stocks for as little as $10 a month with an automatic monthly contribution.
Look at the list of “dividend aristocrats” stocks that have consistently increased dividends every year for at least 25 years. You can find the most updated list by doing an internet search.
Dividend aristocrats are blue chip stocks consisting of top-quality dividend stocks that frequently have a dividend reinvestment plan available, with very low fees and low minimum investments. By directly investing a portion of you investing dollars here you can build a nice group of stocks, you own directly, and at retirement (after years of investing) pays out a nice dividend check at retirement.
The quality rule can then be simply stated as: Invest in great businesses that have a proven long-term record of stability, growth, and profitability. There is no reason to own a so-so business when you can own a great business for a very long time.