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Adjusting to dividend growth investing
#5
I'm a new DGI investor myself and my savings is about $1000 every 2 months so you are far ahead of me.
I'm also starting positions with $1000 per company just like you.

I made some bad choices when I started (a bit over a month ago, you can read more about it in my IRA portfolio post) but I'm learning.

The most important thing I learned so far is to consider "Yield on Cost" (YOC) over "current yield".

Lets consider two dividend champions (data is taken from David Fish's CCC list):
T (high yield low growth) pays 5.17% and has 5 year DGR of 2.4% (and declining...).
TGT (low yield high growth) pays 3.49% and has 5 year DGR of 18.3%.

Let's open positions with both companies for exactly $1000.

Assuming DGR is steady at the 5 DGR rate specified above we'll have the following YOC:
1 year: T=5.29%, TGT=4.13%
2 years: T=5.42%, TGT=4.77%
3 years: T=5.54%, TGT=5.41% <== WOW they are close!!!
4 years: T=5.67%, TGT=6.04% <== Ok, TGT is a bit better, but does it worth it?
5 years: T=5.79%, TGT=6.68%
...fast forward...
10 years: T=6.41%, TGT=9.88% <== I'm starting to like this!
15 years: T=7.03%, TGT=13.07% <== Almost double YOC!
18 years: T=7.4%, TGT=14.99% <== Ok, I'm definitely going to buy TGT now...

I plugged the data to excel sheet I just created (and probably delete in a minute).

Considering you are just 29 and have more than 10 years of savings to do than I think you should focus on dividend growth rate (DGR) rather than dividend yield.
That approach might change if you were closer to retirement and don't have enough dividends to live on but I don't think that will happen considering how young you are and how much YOC you can generate.

Another thing to remember is what is your exit strategy.
My exit strategy is very simple, if the company reduced the dividends than I'm selling everything ASAP.
I'm not allowing myself any other exit so the price of the stock doesn't play any role in my considerations.

If you want to sell the stocks on some later date than that's fine, but you'll be sacrificing the YOC because it's unlikely that you can replace the 15% you get from TGT in 18 years with a fresh investment.
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RE: Adjusting to dividend growth investing - by daat99 - 08-19-2014, 04:27 AM



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