The recent events on the stock market cause many if not all of us to review our investment strategy. When markets fall as they have during the last couple of months it is a very difficult time for many of us. If we could accurately time the markets then we would make a lot of money, however, timing the markets for most of us is not something we have the necessary time and knowledge to be very successful at.
So is there an investment strategy that allows us to sleep at night, meet our long term goals and keep us somewhat sane during times such as these. Upon consideration of several strategies I have arrived at a method that I think will in the long term be the soundest of the strategies.
Invest for dividend growth
In its simplest form the strategy that will develop the most reliable source of wealth in the long term is the strategy of investing in blue-chip companies that produce steady increases to dividends over the long term. It should be possible to find companies that will double the value of their dividends every five years. As such you will not necessarily be investing for capital appreciation of a stock but for the steady growth in earnings and consequent growth in dividends.
Investing for dividend growth is of necessity a long term investment strategy. There is no get rich overnight aspect to it. One must be patient and allow the growth of dividends to take place over time, however, the strategy when well implemented is as close to fool proof as any strategy out there. For instance, a dividend based portfolio paying $1000 a year forty years ago would today pay in the neigbourhood of $250,000 a year without any reinvestment of the dividends. This assumes a doubling of the dividends every five years, which has been the case for a number of stocks.
Given a bear market like we are now experiencing, the capital portion of our investment could be cut in half within a few months. Unless one was to have sold and waited to repurchase then the capital portion of the investment will have disappeared and is no longer available for spending, which is after all why many of us invest. Investing for dividend growth though just means we can buy more for less as we will hold these stocks for as long as the company is viable and instead spend only the dividends.
The dividend portion of your investment will however, continue to pay dividends. They may slow down a bit for a period of time but you will continue to have dividends being paid into your account even as the stock price takes a dive. These dividends can then be spent or reinvested at a lower stock price.
The general rule that I have come to live by, in order to sleep soundly in all markets, is “Only buy stocks that pay dividends”. Additionally, “Only buy stocks where the dividends grow”. The better the dividend growth, the better the annualized rate of return will be.