Dear DTA,
My goal is to build up liquid assets. I am looking to buy safe but aggressive stocks that offer a high rate of return.
-Kellen B.
Thanks so much for taking the time to write in, Kellen.
Your desire to maximize safety and return at the same time is kind of the holy grail of investing.
However, perhaps surprisingly, there’s a strategy out there that’s designed to do just that.
And I personally used it to go from below broke at 27 years old to financially free at 33.
[ad#Google Adsense 336×280-IA]I share exactly how I did that via my “blueprint” for early retirement.
You can probably guess that I had to save and invest as much as humanly possible.
Well, that’s pretty much what I did.
I cut expenses to the bone while simultaneously figuring out how to increase my income.
And then I put all of that excess capital to work.
The investment strategy I used?
Dividend growth investing.
This strategy potentially reduces one’s risk because it involves investing mostly in blue-chip stocks that have lengthy track records of increasing profit, and that increasing profit is generously and directly shared with shareholders via growing dividend payments.
You can find more than 800 examples of dividend growth stocks by pulling up David Fish’s Dividend Champions, Contenders, and Challengers list, which is a fantastic resource that’s compiled information on stocks that have paid increasing dividends for at least the last five consecutive years.
You’ll find a lot of blue-chip names on this list: Exxon Mobil Corporation (XOM), Wal-Mart Stores Inc. (WMT), and The Coca-Cola Co. (KO) are just a few examples.
Investing in this manner tends to reduce risk because these companies are operating at a high level, minimizing the odds of huge losses by their investors.
It’s not like people are all of the sudden going to stop consuming beverages tomorrow, meaning The Coca-Cola Co.’s business model is fairly safe.
There are plenty of risky investment strategies out there.
Some like to play the penny stocks. Others try to invest in start-ups that may or may not make it. So on and so forth.
However, dividend growth investing is inherently less risky than most other investment strategies because you’re usually investing in well-established and very profitable companies.
Moreover, one can further reduce their risk by insisting on a margin of safety when they buy stocks, which can be accomplished by buying a dividend growth stock when it appears to be undervalued.
I actually cover an undervalued high-quality dividend growth stock every Sunday, which is a series that’s designed to provide actionable long-term investment ideas for readers.
What’s interesting, and perhaps counterintuitive, is that upside is maximized precisely at the moment when downside is minimized. Moreover, one’s passive income potential is usually maximized at the same time downside is minimized.
That’s why valuation is so important.
Investing my savings in high-quality dividend growth stocks at appealing valuations has resulted in the six-figure portfolio I now control, and this portfolio generates five-figure dividend income on my behalf.
Not only is dividend growth investing less risky than most other investment strategies, it also tends to provide more long-term total return, which can be boosted by focusing on dividend growth stocks when they’re undervalued.
In fact, Ned Davis Research has found that dividend growers & initiators outperformed (from 1972-2012) the following: dividend payers, non-dividend payers, dividend cutters, and the broader market as a whole.
Said another way, dividend growth stocks are likely to beat pretty much all other stocks out there over a long period of time (with 30 years being a great proxy for the long haul) in terms of total return.
That’s because dividend payments make up the bulk of stocks’ long-term total return over long periods of time.
And if dividend payments are growing, the aggregate number just increases dramatically as compounding takes hold.
Moreover, those growing dividend payments are a great litmus test for growing profit: if a company isn’t growing profit, it probably can’t grow its dividends; if a company is growing its profit, shareholders deserve their rightful share of that growing profit.
For a primer on how dividend growth investing works and why it’s so great, I’d recommend checking out fellow contributor Dave Van Knapp’s series of lessons on dividend growth investing.
Dividend growth investing has treated me exceptionally well over the last seven years.
I’ve been able to minimize my downsize while simultaneously maximizing my upside.
Meanwhile, the growing dividend income from underlying business operations adds up to a significant annual salary for me, one which I don’t have to lift a finger for.
Maybe this strategy works for you. Maybe it doesn’t.
But the key, Kellen, is finding that which works for you and getting started immediately.
That’s because the best time to start saving and investing is today.
I wish you luck and success.
Jason Fieber
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Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.