Consistent income

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(This was originally published in the October 2016 version of The Dividend Growth Newsletter. It is available here.)

Not only are dividend-paying stocks popular because they can be a source of consistent income, they are also an excellent gauge for a company’s success. Dividends are paid out from retained earnings, and only those that can grow their earnings can afford to pay and raise their dividend each year.

From the issuing company’s point of view, it’s a gesture of gratitude to their shareholders and a way to attract more investment into the company.

A history of consistent and growing dividends is a strong indicator that the company is financially successful; in turn, successful companies make for good investments.

As investors take advantage of these investments, this demand naturally drives up the stock price, further reinforcing the idea that the company is in excellent standing.

The hard truth

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(This was originally published in the September 2016 version of The Dividend Growth Newsletter. It is available here.)

The hard truth is that almost no one becomes a millionaire overnight. Get-rich-quick schemes are just that – schemes that get you thinking about bags of money, but not the consequences when things go awry.

Warren Buffett’s considered the world’s greatest investor and he never won the lottery. His method: compounding money every year over a long period of time. A cursory look at his portfolio reveals that his biggest positions are in four dividend-yielding stocks: Kraft-Heinz, Wells Fargo, Coca-Cola and IBM.

Compounding is powerful because investors can earn interest off their own interest. Dividend Aristocrats have the ability to provide average returns of 10% a year while providing the safety and yield that other non-dividend paying stocks fail to do.

According to the Globe and Mail, the average Canadian household savings rate is at 3.6%. If you make $50,000 per year, you will save $1,800, and at a 10% return on your investments, it will take 42 years to become a millionaire.

Take, for example, Ronald Read, a Vermont gas station attendant who amassed an $8 million fortune by living frugally and avoiding fads and bubbles. Among his 95-stock portfolio, he owned Dividend Aristocrats such as Procter & Gamble and Johnson & Johnson.