I am well into my 12th year of investing and have a passion for investing in dividend paying companies. Although I also enjoy investing in quality non-dividend paying growth stocks, I make it a priority to allocate at least 70% of my portfolio to dividend payers. Investing in a diverse group of quality, dividend paying companies and reinvesting the dividends is a proven, long-term strategy that works.
When you invest in dividend paying companies, you are basically receiving free money over and over again without doing any work. This is a concept that I have embraced and recommend highly. As long as the dividend is not cut or eliminated, this stream of money will continue indefinitely until the day you sell the stock. By reinvesting this free stream of money to purchase additional shares and combining it with dividend increases and capital gains, you can unleash a compounding machine that will rock your world! In order to assist you in developing your own successful dividend portfolio, I am providing five pointers to help you get started:
1.) Diversify. Invest in at least 15 stocks in varying sectors in order to properly diversify. By spreading your investments into multiple sectors such as technology, healthcare, industrial and energy, you can minimize the pain in the event of some widespread hardships such as the ones that occurred during the recent financial and automobile bailout period. Additional methods of diversification include investing in companies of various sizes and risk levels, and including some international exposure.
2.) Research. Be very selective in the companies that you invest in. Develop a watch list of dividend stocks that you would like to consider investing in and learn as much as possible about these companies. Start with the companies that you know well. If you regularly use and love The Procter & Gamble Company (NYSE:PG)’s products, or think that The Coca-Cola Company (NYSE:KO)’s beverages are the best, then consider investing in these companies. P&G and Coca-Cola are a couple of my favorite dividend holdings and I recommend that you include them on your watch list. In order to help you to get started on your research, I am providing a brief analysis of PG, KO, and another favorite, Oceaneering International (NYSE:OII) as follows:
Procter & Gamble is a consumer products powerhouse that owns an impressive portfolio of brands that are sold in 180 countries. In fact, P&G has 25 brands with annual sales of over $1 billion that include Crest, Gillette, Olay, Charmin, and Tide. P&G’s extensive research has enabled them to continue developing innovative, high quality products. An important part of P&G’s growth has been making successful acquisitions such as Gillette, which enabled them to expand into the shaving and battery markets.
P&G has an impressive dividend history consisting of 57 years of consecutive annual dividend increases and an average annual dividend increase of 10.6% over the last decade. Their current dividend yield is 3% with a payout ratio (percentage of earnings used to fund the dividend) of 54%, which means that there is plenty of room for future dividend increases. P&G’s sales have increased from $43.4 billion in 2003 to $83.7 billion in 2012 and its net income has increased from $5.2 billion to $9.2 billion over this same period. P&G had a rough stretch during the great recession, partially due to some consumers being forced to purchase cheaper, lower quality products. However, the latest earnings report was very positive due to recent price increases, cost cutting efforts, new products, and a return of some of these consumers. Also, the full-year guidance was raised.