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The Second Rule of Dividend Investing

When you invest in companies that have a strong history of growing dividend payouts, you know fairly quickly you have found a well-managed company with sufficient cash flow from operations to buy back its investors with dividends that are increasing every year.

"Dividend increases are a sign that companies are comfortable their future profit will be resilient."


So the second rule of dividend investing is the "price rule". As a guideline, invest only in stocks with 25 or more years of dividend payments without a reduction and have a strong balance sheet, typically these are companies you would find in Dow and/or S&P 500 index of companies. Of course you can pick companies like Apple, Amazon, Microsoft, Facebook because they are doing extremely well, dominating their markets and the stock prices are driving returns in the financial markets. Some like Microsoft even pay a dividend, so you could make the case that is no longer a growth stock. My suggestion is to first build your financial foundation with strong dividend paying companies and then add in the top growth companies as you gain experience and have the foundation of dividend stocks because they have a history of falling less in a market correction.

You can find the list of the best dividend growth stocks on the list of Dividend Aristocrats. It is currently only about 65 stocks. As a group these stocks have a history of outperforming the S&P500 in down markets and consistently do well in rising markets.

Now here is that list of stocks listed on the Dow index and with a long history of paying increasing dividends. Note the company at the top of the list, 3M. It’s paid an increasing dividend almost every year for the past 56 years (only missing a dividend increase recently), requires only $10 per month to start and has a dividend of 4.10 percent. You can’t get that at any bank. (click on any of the company names to get more information on how to buy shares directly).

1. 3M

Each of these companies have a history of increasing their dividend payout every year, but do your research on what the current dividend might be. They all also have a dividend reinvestment plan that can start for as little as $10 a month (3M) and be as much as $500 a month in the case of McDonald’s. Many companies uses services from companies like E*TRADE and Computershare to administer their share purchases and dividend reinvestment plans.

On the list, you will see companies with products that we all use, even in tough economic times, you need to buy gas, fast food, bad-aids and household products. If you only invest in these well-known companies with a long-term history of paying growing dividends you don’t have to worry about stocks selection and you have invested in great companies, which takes us to the next rule.

Floyd Saunders is the author of Figuring Out Wall Street. His next book, Five Paths to Wealth will be published in October of 2021. You can learn more about him at his author web site.


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