One of the biggest issues we will face in the upcoming years is one of interest. In fact, we can say that roughly 90% of the population is in the same boat for this issue; we are on our own to plan our retirement. Fully funded pensions are more rare than Pandas in China and the Government provided pension is barely enough to buy ramen noodles once you have paid your rent.
Which kind of retirement are you planning?
I don’t know about you, but I don’t plan on working my whole life. Maybe it’s because I’m one of the generation Y or simply that I realized that there is something more important than working. As I previously mentioned, I’ve stopped living to pay for my mortgage. There are a few factors we have under our control to enjoy a happy retirement, regardless of what your definition of retiring looks like:
How long/hard we work
How much we save
How we invest
Depending on your background, how much you make at work and how much you can save can be highly variable. However, how you invest is fully under your control. With the money saved, you can decide to invest in various investment vehicles from certificates of deposit to stocks with mutual funds in between. However, did you know that the choice of your investment strategy will have a very important impact on your retirement?
If you are looking for “safe” investments, you will opt for certificates of deposit and bonds. While you will avoid most of the market fluctuations, you will be stuck with maturity dates and most likely, an interest rate that barely covers the cost of inflation.
If you invest in mutual funds, you will be looked after by professional investment management and your portfolio will avoid many investors’ beginner mistakes you may have made otherwise. However, you will be charged high fees (MERs) that will eat up a part of your capital / profits and the withdrawal process may be limited.
If you choose to invest on your own, you will save on MERs and will gain full control of your portfolio…. for better or worse. It’s important that while I advocate you take control of your destiny, DIY investing is not for everyone and many investors do much worse than mutual funds even considering the high fees.
However, there is a way to avoid most investors’ mistakes by choosing dividend growth investing. Let me explain to you how…
The Difference between Dividend Investing and Dividend Growth Investing
First and foremost, simply by choosing dividend growth stocks, you are picking among the most solid companies in the world. Note that since the beginning of this article, I don’t use the words “dividend investing” but “dividend growth investing”. This is the magic word: GROWTH.
By selecting among companies paying a dividend each year, you select businesses sharing their profit with their shareholders. However, some dividend payments maybe limit the company’s growth. In this case, the first thing the company will do is to not increase its payment for a while. When this happens, the company usually stagnates and this is not good for anybody.
This is why it is important to select companies showing a strong dividend growth history. This is your proof the company can actually do both: grow its business (e.g. revenues and profit) while increasing its payments to shareholders. This is the best of both worlds. In order to help you on this journey, I recently issued my Top 10 Dividend Growth Stocks guide you can download for free here.
Now that we know dividend growth stocks are more important than simple dividend stocks, let’s see how it can solve our retirement issues.
Why Dividend Growth Investing is the Best Choice for Retirement Planning
One of the first reasons why I personally chose to stop actively trading (e.g. 2-5 trades per month) and opt for dividend growth investing was because this investment strategy is both simple and effective.
It is simple as you don’t need to time the market. You don’t need to wonder if the company you are buying is bought at the right time. You actually buy shares of a company that you know will pay you a nice dividend and this payment will always (all things considered) increase through time. It’s simple because you can easily select minimum requirements and build your investment model (I detailed mine here). Finally, it’s simple because as long as the company shows it can keep increasing its dividend next year, you barely have any reason to sell.
It is also very effective. The growing dividend will cover the cost of inflation by itself. Therefore, if you can live off your dividend today, chances are you will never have to touch your capital and keep living on your growing dividend income forever as there are tons of companies showing a dividend growth rates that beat inflation. It is effective because in the end, strong companies always provide investors with strong returns. A company that is able to increase its dividend payment year after year is also a company showing increasing revenues and profits at the same time. Such a business can definitely be included among the “strong companies” that will provide you with strong returns.
When you chose dividend growth investing, you choose to keep your precious time for things that matter such as spending time with your family and friends instead of spending time finding the next Apple, Tesla or Netflix. You don’t have to hit homeruns with dividend growth investing as these strong companies just keep getting better slowly, but surely.
Historically, dividend growth stocks are also less volatile than the regular market. In other words, it means that you will sleep at night once you are retired instead of worrying about the market. Sometimes, stability is worth more than high returns, especially when you count on this money to live next month!
Finally, another great advantage about dividend growth stocks is that they are mostly predictable. Of course, Mr. Market will have its mood swings and your portfolio will still take a hit, but you can always count on the dividend payment to be deposited on a quarterly basis. If you build your portfolio the right way, you will be able to average a similar dividend payment on a monthly basis and this will be predictable. A fun thing is that your monthly payment will increase month after month due to the dividend growth policies your companies have.
How to Get Started
If you are wondering how to get started with dividend growth investing, I can offer you a free and easy way to start ;-). Enter your name and email address in the box below and subscribe to my free investing newsletter. You will receive more info about dividend growth investing along with free guides to help you in your investing journey.
And if you are in a hurry to start; take a look at my Top 10 Dividend Growth Stocks report.