The goal of this project is to generate $1,000 in monthly dividend income. I invest roughly $1,000 per month in new capital, and then reinvest dividends.
As you have observed, I have a tremendous amount of latitude about the types of companies I invest in. My overall goal has been to buy good companies, selling at good prices, which would likely grow earnings, dividends, intrinsic values over time.
In other words, Dividend Growth Stocks.
There are largely three types of dividend growth stocks.
Those with a lower current yield, but a higher expected dividend growth
Those in the sweet spot that spot a median dividend yield, as well as a decent expected rate of dividend growth
Those with a higher current yield, but a lower expected rate of dividend growth
Now, those are rough guidelines. There are absolutely high yielding companies that also have a dividend growth that could be similar to group 2 and sometimes even group 1 in some rare occasions. But the exceptions are just that, exception. Most of all, the above three groups are just rough guidelines, and mental models. It is important to think about various dividend growth stocks with this mindset of a trade-off between yield and growth. Value and growth are connected at the hip, to paraphrase the Oracle of Omaha.
This mostly fits with the next paragraph, because when I tell strangers (mostly on the internet) that I invest in Dividend Growth Stocks, they immediately assume that I chase yield. I guess in their mind dividend = chasing yield. Only a small fraction of investors understand the concept of buying quality companies at a good price, which tend to grow earnings, dividends and intrinsic values over time. So naturally, many get confused when I discuss lower yielding securities, that have the potential to grow dividends at an above average rate over a period of time.
Naturally, this brings us to the concept of yield on cost. This is basically a forward looking metric that compares future dividend income received at a certain point in the future relative to historical cost basis/purchase price. It is helpful to visualize the three concepts above of the trade-offs between yield and growth, by thinking about future forward yields on cost.
For example, a stock yielding 1% may not really excite you. However, if that company can grow dividends at a rate of 15%/year, it would be able to roughly double dividends every 5 years. So in theory, in 20 years, you’d be sitting at an yield on cost of 16% (that doesn’t take into consideration dividend reinvestment).
Now the flip side of course is that trees do not grow to the sky. Growing at 15%/year for 20 years is not easy. It is possible if a company starts with a low payout ratio and grows dividends faster than earnings. But there have been companies in the past that could grow EPS at a decent clip for a long time. If you are the right company, in the right industry, you may be able to ride a long trend for decades. Chances are that the payout ratios will be low so the dividend safety will be higher. There have been many companies like McDonald’s in the 1970s and 1980s and Wal-Mart in the 1970s and 1980s that had low current yields, but delivered above average dividend growth. And very high yields on cost.
On the other hand a stock yielding 6% or 8% today may entice you. However, if the dividend payment does not grow by much, you may end up losing purchasing power to inflation. Plus, oftentimes companies that yield a ton tend to also have high dividend payout ratios. This means that the dividend is not as safe. Plus, if earnings per share are stagnant, companies may be unable to grow dividends for a long time. And if management gets envious of all the other growth opportunities out there, they may decide to cut the dividend to “pursue growth initiatives” . The spoiler is that often times shareholders would have been better off with the higher dividends, rather than a risky project or a debt-fueled acquisition binge that burns money on fire ( This is somewhat repetitive, but I really want to acentuate the fact that many acquisitions fail to deliver and a lot of times managements tend to allocate into projects at the worst times possible).
On the other hand, sometimes you may see a company that is unfairly beaten down, with a high yield and a decent growth. Sometimes sentiment does turn, as people’s feelings get depressed about the future, so that could present a decent opportunity for the enterprising intelligent dividend growth investor. Who is most likely reading this newsletter as well as sharing their research with us. This is a hint.
This is a nice neat summary above, to start addressing a question I often get. I also sometimes think about how much life would be easier in a perfect world. I often get asked as to why can’t I simply sell the lower yielding securities in the portfolio, and just buy higher yielding securities. If I were to get into stocks that yield 6%, I’d likely be close to $10,000 in annual dividend income on the Dividend Growth Investor newsletter. Right now, the newsletter is projected to generate about $4,100 in annual dividend income. For reference, check out the portfolio holdings as of August 2026.
Note, I won’t do that because of several reasons.
This would affect the composition of the portfolio. I would trade lower yield but higher expected growth for a higher yield and lower expected dividend growth.
That lower expected growth would likely be below rate of inflation. So if someone retired on that $10k they’d slowly lose purchasing power. I want dividends that grow organically, above rate of inflaiton. That increases the ability of portfolio to endure over time. Plus that higher growth can also provide some built in cushion to help net worth keep up with inflation as well.
That higher dividend would be riskier, as companies yielding a lot today have generally higher dividend payout ratios. I want dividends with a higher chance of enduring throughout the ups and downs of the economic cycle.
That dividend would also be riskier because it would likely be more heavily concentrated towards sectors that are paying higher dividends today. Those could include Telecom, MLPs, Tobacco etc.
Not to be the bearer of bad news, but selling also carries steep opportunity cost. My review of investments over the years has shown me that my sales have been a bad idea in general. That was then compounded by the fact that the replacements did not do as well as the original company I sold. In other words, I would have been better off just developing a drinking problem addiction, and forgetting about my portfolio. What is that Fidelity “study” that the best investors are “dead”. My “study” claims that the best investors are drunkards. (Full Disclosure: Long Brown-Forman).
Wait, I forgot about the tax-man (It’s always a he/him). When you sell appreciated securities in a taxable account, you incur capital gains taxes. Those sabotage the compounding process, because now you have less capital to deploy that before. On top of that, too much income from dividends could end up being taxed at an unfavorable rate as well. This is why I have been increasingly shifting my attention to retirement and as many other tax-deferred plans and vehicles I could get my hands on, versus focusing on taxable accounts too. That being said, each account type does come with its own delicate, intricate and arcane sets of guidelines on contributions, distributions and whatever is the correct term for what’s in between.
Also note that there are various instruments out there that have high yields. However, the underlying dividend payments are fluctuating, hence they are not going to be reliable streams of income. I would never own these types of investments, because they often turn out to be the opposite of dividend growth investing. I learned that lesson following a Closed End Fund that invested in High Yield Bonds at the beginning of the 2000s. The fund always yielded something between 8% - 10%, but the dividend ended up being halved over a period of say 5 - 10 years. Hence, the yield on cost turned out to be something like 4% - 5%, with a nice unrealized capital loss of roughly half.
Those are trading sardines.
Hence, you won’t see me peddling Closed End Funds, Options Funds or Leveraged Products. I may also add Mortgage REITs too. If I am not including something, it’s likely because I am forgetting about it. Now if I really wanted to make a lot of money by writing newsletters, I would just talk about Options ETFs. Note, options are zero sum game, which is why you are actually better off just owning the underlying security, rather than sells puts or calls on it.
The too long didn’t read caption is that I try to build out the portfolio on solid ground first, so it can withstand much of whatever the world throws at it, and still be able to grow dividends above rate of inflation over time.
I guess I saved the best for last, but I also added to an existing position today in the retirement account as well.