The Ultimate Goal of Dividend Growth Investing

Investing in dividend growth stocks has become a very popular strategy for those seeking a different way to reach financial independence. We don’t want to follow the traditional method of withdrawing 4% of our investment portfolio to cover our expenses during retirement. Dividend growth investors don’t want to have to sell their assets at all. Rather, the goal is to accumulate a portfolio of companies that pay out an annually increasing amount of dividend income. The idea is that this dividend income can be used to cover our living expenses so that we need not sell any of our stocks. Ultimately, this income stream from dividends will grow at a rate faster than inflation as the companies we have chosen to own will increase their dividend rates year after year.

Therefore, while there may be a few different goals of dividend growth investing. there is one ultimate goal which is income. Dividend growth investors want to create a growing stream of dividend income that will be able to cover all necessary expenses and will grow over the years as those expenses grow due to inflation.

Protecting Income Through Diversification

For those who have reached financial independence through dividend growth investing, the passive income stream of dividends is the most important thing to protect. There are a few things investors can do in order to try to increase the safety and reliability of our income stream. Investing in the most stable, solid blue chip companies with long histories of dividend growth will help. Doing the proper research and making sure the company and its dividend are strong and not at risk will also help. However, the amount of diversification an investor has can have the biggest impact on how safe their overall portfolio income remains.

Diversification is important to investors relying on dividend income to cover living expenses. The more diversified a portfolio is along with the more securities held provide a safety net should some companies owned be forced to cut or eliminate dividends.

Example Portfolios

To illustrate, I want to take a look at a hypothetical million dollar portfolio made up of 10 dividend growth stocks with equal weighting. See the table below of 10 randomly selected Dividend Champions. Let’s assume an equal weighting of $100,000 invested in each security. For this demonstration I’ve used current dividend yields from April 26, 2013.