What does dividend mean? It means passive income for me. It also means the possibility to reach early retirement and live off my dividend income! I currently receive 100$ per month in passive dividend income and this is growing every month! This is extra money I could spend, this is extra money I could pay my bills with and this is extra money I can reinvest. That’s what I do!
In the end, a dividend is simply a distribution of a portion of a company’s profit to its shareholders.
But for me, a dividend means much more.
Become an owner and receive a dividend
When you buy the stock of a company, you buy a part-ownership of that company. And if that company pays a dividend, then your shares give you the right to get your part of the cake!
What most people don’t know about dividends is that they are the ones who drive most of the market return. In fact, many studies discussed in Lowell Miller’s book claim that more than 90% of the market return comes from dividends alone!
Typically, people think that to make a profit in the stock market one must buy a stock low and sell it high. While a dividend approach will focus on dividend growth instead. In fact, when a company pays a dividend every year and raises it every year, then the price of the shares also follow.
Dividends act both as a security net and as a share price driver.
Tons of companies pay growing dividends
This is the best kept secret of Wall Street!
There are tons of companies paying dividends out there but they are not made equals. Some companies have a net competitive advantage over their peers and as such, they are able to not only pay a dividend, but also to raise it every year even if the market collapse!
Warren Buffett, the greatest investor of all times, calls these stocks “wide moat” stocks. I think here about companies such as Johnson & Johnson (JNJ paid and raised its dividend for 52 consecutive years) or Coke (KO paid and raised its dividend for 52 consecutive years) just to name a few.
Not only do these companies have paid and raised their dividend every years for decades but they also raised it at a rate a lot higher than inflation. For example, this year I received a 9,5% raise from Exxon, a 17,6% raise from Jean-Coutu (a Canadian drugstore), a 5% raise from McDonald’s, a 6% raise from Philip Morris… and so on!
When people talk about dividends, they usually talk about the yield. The yield is simply the dividend per share divided by the price of a share times 100. It is expressed in percentage.
Exxon currently pays a 2,76$ dividend and the last closing price was at 93,64$ so the current yield is 2.95%.
As a dividend growth investor I’m also interested in the dividend payout ratio. For a dividend to be sustainable, one must make sure that the payout ratio isn’t too high because a slight decrease in revenues might oblige management to cut or freeze the dividend.
Also, for a dividend to be sustainable, the revenues, sales and earnings must also grow at the same pace.
If you want to know more about dividend sustainability and about how to analyze dividend growth stocks, reach my page.
Dividend means freedom for me!
So what does dividend means for me? It means getting paid for owning shares, it means seing my income growing faster than inflation every year which means that my income is “insured” against inflation. It means freedom too!
We call that strategy dividend growth investing. I plan to reach early retirement at or before 45 years old using that strategy!
Full disclosure : long JNJ, PJC-A, XOM, O, PM
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