Why I like growing dividends

Dividend growth investors typically focus on companies with stable operations, low debt, economies of scale, and that manufacture or sell everyday goods and services. My portfolio is filled with high-quality companies with competitive advantages, brands, technological advantages or patents. This strategy has more than one advantage for investors who have a long-term horizon and who have set financial independence as their main objective.

Here's why I particularly like growing dividends:

1. Investors who buy an asset with the hope of reselling it later at a profit may be particularly affected by there volatility of the market. This is one of the many reasons I have stayed away from gold. Emotions are the cause of wealth destruction. If you buy a stock at 35 $ and sell it at 40 $ or more and the stock drops to 30 $, it is easy to panic because the gap between your goal and reality widens. The investor then looks to sell while he still can. The lack of control over emotions is one of the reasons why most investors would be better off investing in index funds.

To ignore the irrational movements of the stock market, I invest in growing dividends. Market swings only represent opportunities to buy quality stocks at a good price. A falling price is a margin of safety against bad fundamental analysis or future problems with the company. With falling prices I can also buy more stocks with the same amount of money. And more stocks means more dividends.

Les cours des titres ne signifient pas grand chose pour moi, à part les acheter à meilleur prix. Je n'ai pas l'intention de les vendre pour financer ma retirement anticipée, de sorte que leur prix m'importe peu. Tant que les sociétés ne coupent pas leurs distributions ou modifient radicalement leur modèle d'affaires,  je suis heureux de continuer à recueillir les dividendes. Je les réinvestis actuellement mais plus tard je les utiliserai pour payer  mes dépenses. Cela signifie que j'ai peu d'inquiétude sur les réactions émotionnelles de l'ensemble du marché.

2. Growing dividends force me to bet on companies with proven quality. It’s difficult for a company to pay dividends for decades while increasing them every year. There are natural disasters, economic cycles, changes in consumer tastes or government regulations, taxes, product recalls, competition, patent expirations, and infrastructure maintenance. Many other things can hurt a company’s ability to pay, let alone increase, a dividend for 10, 20, or 50 years.

Only companies with fantastic products, prudent use of capital and a focus on shareholder returns can sustain such dividend histories. A company like Coca-Cola (KO) has weathered the trifle of two world wars, the Great Depression, three oil shocks, the fall of the WTC towers, the financial crisis following the subprime mortgages, followed by the government debt crisis... High-quality companies overcome failures and continue to create value for shareholders in the long term. They continue to pay, and increase dividends over very long periods. The latter are tangible proof that the company is working properly, without resorting to accounting tricks.

Sure, I could invest in a hot stock of the moment like Netflix, Inc. (NFLX) or Facebook Inc. (FB). But they would have to be able to survive big economic changes while increasing their stock price, since they don't pay dividends. They don't have a long history to speak of, but they are very trendy. So that must count for something. And, they are relatively cheap, just think... FB currently has a P/E of 183 and NFLX has a P/E of 316. Why buy a quality company like KO, whose stock currently "forces" an investor to pay 22 times earnings when you could pay nearly 183 times earnings for an unproven company like FB? Plus, the old KO is paying you to own it, while the kid Zuckerberg gives you nothing.

3. A quality company's dividend growth outpaces inflation, which increases my purchasing power over time. The inflation rate over the last 10 years has averaged close to 4% per year in the US. Most of the companies I am invested in are increasing their dividends at a rate that far exceeds this figure. For example, the company Procter & Gamble (PG)  recently increased its dividend by 7%, after 59 consecutive years of increases. Compare that to bonds that pay a fixed interest rate to the holder. A 10-year US Treasury bond is paying you 1.70% per year right now. That means you're likely to receive a negative total return over 10 years if you were to hold it to maturity, due to inflation. Between that Treasury bond and PG's 3.10% yield (not including dividend and stock price growth), the choice is clear.

4. Dividend income is truly passive. Beaucoup de gens rêvent d'une source de revenu passif leur permettant de financer leur mode de vie comme ils l'entendent. Eviter de devoir se farcir le fameux "métro-boulot-dodo" jusqu'à 65 ans, juste pour payer des factures, ce serait quand même pas mal... Un revenu passif signifie que vous gagnez de l'argent presque sans aucun effort. Souvent cette notion est associée aux blogs, posséder sa propre entreprise ou investir dans l'real estate. Bien que toutes sont des sources valides de revenus à des degrés divers, sont-elles vraiment passives?

Blogging is anything but passive. I spend many hours a week writing new articles and managing my site. Similarly, owning your own business is time-consuming, even though 3/4 of startups fail. Real estate is commonly considered a passive income source, but for that to be truly the case, you would have to leave the management to a real estate agency. However, these companies eat up a portion of your profits, and they will contact you anyway about important decisions, like replacing certain appliances or evicting tenants.

Coca-Cola (KO) ne me contactera jamais parce qu'une ligne d'assemblage rencontre un problème mineur ou parce que l'un de leurs milliers d'employés a un problème personnel. L'entreprise va simplement continuer à faire ses affaires et m'envoyer mes dividendes sans poser de questions. Le revenu de dividendes est vraiment passif, et même mieux, c'est un revenu qui est complètement indépendant de la localisation. Vous pouvez prendre la retraite à l'étranger ou voyager indéfiniment si votre revenu de dividendes est suffisant. Les dividendes sont aussi passifs parce que vous n'avez pas besoin de vendre des actions afin de recevoir un revenu. Vous n'avez rien à faire pour recevoir l'argent une fois que vous avez investi dans une entreprise qui verse des dividendes en espèces.

5. Dividends are reliable and regular, like bills. With dividends, you have a pretty good idea of how much you're going to get, and when you're going to get them. For example, Johnson & Johnson (JNJ) a toujours payé des dividendes en mars, juin, septembre et décembre (généralement autour du 13 de chaque mois). Et vous savez que JNJ va envoyer 0,66 $ de dividende trimestriel comme ils le font habituellement, à moins qu'ils décident de l'augmenter. La régularité des dividendes, et leur augmentation, sont le parfait antidote aux factures qui tombent tout aussi régulièrement. Si vous utilisez vos dividendes pour payer vos dépenses, vous apprécierez le fait que les entreprises vous versent une partie de leurs profits sur une base régulière et fiable. Voilà qui contraste avec l'exemple de l'immobilier. Un locataire qui ne paie plus son loyer, un appartement qui demeure vide ou la réparation de quelque chose sur la propriété... rien de très agréable à gérer.

Conclusion

Growing dividends allow you to invest without stress, without panicking and without having to work too hard. The strategy is viable, sustainable and offers solid total profitability over the long term. The resulting passive source of income allows you to finance an early retirement. Do you need more?

Source : http://www.thediv-net.com/2013/05/why-i-love-dividend-growth-investing.html