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An Exclusive Interview Guide to Dividend Growth Investing for Market Outperformance.

Dividend stocks traded on the S&P 500 have provided investors with returns close to twice those of stocks without dividends over the last 93 years. That's according to a piece published on Investopedia. Dividend growth investing allows investors to generate both income and capital gains. Yet, many investors who embark on such a journey fail and reverse course shortly afterwards. In this article, we bring on board someone who has experience generating income through dividend growth investing. Through this interview, we:

  • Define dividends.
  • Help you avoid the dividend investing yield trap.
  • Outline two simple metrics to help you pick great dividend stocks.
  • Help you decide between dividend reinvesting vs pocketing your cash payments.

I am joined today by Jimmy, founder of the blog Dividend Cultivator and author of eBook "Too Much Money: How to Create an Automatically Growing Perpetual Income Machine With Dividend Growth Investing". Jimmy has a strong background in banking and software engineering. Jimmy is known for helping investors develop a dividend growth investing strategy to increase current income effectively and succeed in their dividend investing journey.

Jimmy took the time to chat with us and enlighten us on this very important topic. Without further ado, let's get right to it, Jimmy. 

What are dividends?

At its simplest, dividends are cash payments from companies to shareholders. There's lots of nuance around that definition, but that is it in a nutshell.

Why do some companies pay dividends?

Typically dividends are paid by mature companies. I think the best way to describe when a company should start paying dividends is when they become a Cash Cow as summarized by Boston Consulting Group's famous Growth Share Matrix (see below). Companies that generate tons of free cash flow, but don't see outstanding opportunities for reinvestment in their industry should pay dividends.

Alternatively, there are certain industries and tax structures that incentivize dividends or distributions. Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs) are good examples. REITs in the US are required to distribute 90% of net income to shareholders. MLPs are often structured to maximize distribution payout because the General Partner of the Partnership earns a fee on the amount of the distributed payout.

How long have you been a dividend growth investor? 

I've been investing since I was in my early 20s, but became a more disciplined dividend growth investor 5 years ago.

[Recommended: How I'm Prepping My Portfolio for a Biden Presidency.]

What inspired you to start investing in dividend-paying equities? 

I'd tried a number of different investing and trading methodologies (technical trading, futures, options, real estate, etc.) but none other than dividend and growth stock investing really worked for me. Ultimately I wanted to secure my retirement though growth stocks and grow a mostly passive side income through dividends.

Do you know the only thing that gives me pleasure? It's to see my dividends come in. 

John D. Rockefeller, American business magnate and philanthropist 

You have an eBook out: "Too Much Money: How to Create an Automatically Growing Perpetual Income Machine with Dividend Growth Investing." What inspired you to write this eBook? Without giving away the kitchen sink, what are some of the things investors will come to appreciate about your eBook?

I've always been a writer and educator. Even in my job as a Software Engineering leader my job has mostly been to educate. I've been quite lucky in my career and had an exit event at the end of 2019 which allowed me to take a couple months off of work. I'd been thinking about writing something for years, but never had the time to do it. So this was that opportunity.

My formal education and training is actually in finance. I earned a BA in Business and have a MBA with a finance emphasis. I worked in banking for 6 years as a commercial real estate analyst before switching careers so I've always had a love for markets and investing.

One of the big things that is different about my book is that I really don't care about dividend aristocrats necessarily. Everyone loves to talk about them, but if you want to actually earn practical income off of dividends then you need to invest in what I call "Cash Flow Businesses". That sounds kind of stupid because all businesses want to grow their cash flow, but I look at these companies more like a Real Estate Investor might.

Real estate investors know that cash flow is king. All appreciation in property value drives from you figuring how to grow that cash flow. That cash flow then gets distributed out in a tax-efficient way and the investor gets to choose how they want to reinvest. As a more income-focused investor we want to balance cash flow with consistent growth.

As you know, investing can be a scary thing. What advice do you have for someone who wants to start investing, but is somewhat apprehensive?

Buy something today.

You can invest with essentially nothing now. $5 with Acorns or Stash or whatever partial share brokerage. You will most likely lose money, but will slowly start to understand how markets move. It's better to lose a small amount of money early, than a large amount later.

You'll slowly grow a bit more confident and understand how to read financial statements or do technical analysis or whatever strategy you decided to take. The most important thing is to take action.

There basically two types of investors: growth and dividend investors. I, myself, am mainly a growth-oriented investor. But I do have a few dividend-paying equities in my portfolio. Do you believe an investor should take a dual investing approach?


I have a blog article on this topic actually.

I've decided to build a financial foundation with growth stocks and index funds. These stocks are held in my retirement accounts so they can grow tax-deferred. I take big bets with a 100% equity portfolio skewed towards disruptive tech stocks. I'm a software engineer so I invest in what I know and have used. It's a classic Peter Lynch strategy. At this point my portfolio is big enough to where I won't have to contribute any more to have a secure retirement at 55 or so.

This allows me to focus on growing my income instead for the next 20 years.

Is there a limit to the number of stocks you recommend for a well-constructed dividend growth portfolio?

I've seen research that suggests that holding more than 25 stocks starts to reduce the benefits of diversification. If you're an individual investor and you're holding more than 25 stocks I can almost guarantee that you're not following all of them diligently enough and it might just be better to hold an index fund. My goal is to have no more than 20. There really aren't that many outstanding stocks that fit my strategy so 20 is perfectly fine.

If you're an individual investor and you're holding more than 25 stocks, I can almost guarantee that you're not following all of them diligently enough.

Jimmy, Founder of Dividend Cultivator

Investors have one of two options with dividend payments: pocket the cash or reinvest the dividends to buy more shares. Is one strategy better than the other? How does an investor decide?

I personally don't like dividend reinvestment plans (DRIPs), but fully understand why one would use them. It's the automatic way to dollar cost average into a stock.

I like to take the cash and reinvest or use as needed personally. I actually use the income so I can take a lower salary for more equity at the startups I work at. Otherwise, I reinvest opportunistically in the best values that I see at the time.

Ultimately though, I believe the market gets mispriced and works in cycles. With a little contrarian investing I think it's possible to find great opportunities where yield opportunities are good AND safe.

Source: Hartford Funds

Let's talk about yields for a moment. Investors sometimes make the mistake of looking for stocks with high yields. As you know, yield is calculated by dividing the annual dividend payout by the current share price and multiplying that number by 100. A stock whose share price has collapsed significantly, as in the case of many current oil and REIT stocks, will have high yields. Honestly, I've fallen prey to this yield trap before. What are some steps investors can take to avoid falling into this trap?

I like to look at two things.

  1. Credit ratings to determine if professional analysts see risk in the company first. An investment grade credit rating is a must.
  2. Appropriate Dividend Payout Ratios

I typically focus on free cash flow payouts for operating companies, AFFO payout ratios for REITs, and Distributable Cash Flow (DCF) coverage ratios for MLPs. These may vary a bit, but for operating companies I like to see FCF Payout ratios of 60% or less, REITs at 80% AFFO or less, and MLPs are a weird story that I still have a hard time getting a handle on. DCF above 1.5 is a good starting point.

I follow you on Twitter. If I'm correct, you did a few career changes over the years: banking, software…What prompted you to make those changes?

I used to be a banking analyst and while I was good at it, I felt like my soul was dying.

I needed to be building things instead of pushing numbers through spreadsheets.

In 2010 or so I took up writing code so I could build some iPhone apps and decided that eventually I would become a software engineer. After I had my first child I made the decision to not have regrets over anything so I jumped into my first job. Then I got chronically ill which was even more of a regret minimization event, so I decided to do a startup. Crazy, but luckily paid off.

The stock market right now is crazy. We have experienced a rapid recovery since equities went down the drain in March. Many stocks are overvalued. Experts continue to predict a nineties-style bubble. It's been a crazy ride. How have you been navigating this volatility? Are you selling? Staying long? What has your strategy been?

Experts are idiots that are marketing for their own company or projecting their own ego so I don't listen to them.

I was a heavy buyer in March, probably a bit too early. I bought a little bit in April. I'm continuing to buy today. Ultimately I'm a believer in capitalism. Prices reset and companies adjust to those prices. Those with too much debt go bankrupt and those that didn't will succeed in the future. It's that simple. As long as those market dynamics exist, I'll continue to invest.

[Recommended: How I'm Prepping My Portfolio for a Biden Presidency.]

We appreciate your time immensely, Jimmy. Keep up with Jimmy on Twitter

The bottom line

Great dividend growth stocks generate a passive stream of cash flow, no matter what's happening to the economy. If you want to become a successful dividend growth investor, you need to properly vet the companies you place into your dividend basket. Companies with solid and competitive advantages make great dividend stocks. These types of companies are better positioned to weather turmoil in financial markets. Also, they outperform over the long run, and reward shareholders richly. 

Did you learn anything interesting from this interview? Please share with us in the comment section. Not sure of how to select great dividend stocks? This powerful stock screening and analysis tool can give you a competitive edge.

Disclosure: This article may contain affiliated links to one or more investment productsWe may receive a small commission when you click on the links and sign up for services. Thanks! Information presented here should not be construed as financial advice. You are always encouraged to conduct your own research. Read our full disclaimer.

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