Dear DTA,
My goal in trading is to make extra money to remodel our house. I also want to help my parents. They’ve retired early. They are 67 and 65, respectively, and they’re both getting older and tired.
-Elizabeth R.
Great to hear from you, Elizabeth. Thanks so much for taking the time to write in to us.
We’re here to provide actionable and valuable advice/information to our readers, so that’s what we’re going to do today.
Now, you have a couple different goals there.
And you also want to help your parents.
I’m not sure how much money we’re talking about here, but anything extra will obviously help you with these goals.
When I think about investing, I try to build up a gaggle of “golden geese”.
And then I want these “golden geese” to lay “golden eggs”.
It’s these golden eggs that I want to use to pay my bills. In your case, you can use these golden eggs to remodel the house and help your parents.
As long as the golden geese are left to their devices, they should continue to pump out golden eggs.
Best of all, special golden geese can not only lay golden eggs indefinitely, but the number of golden eggs can also grow in number, providing even more resources (again, to remodel the house and help your parents).
This is how I think of dividend growth investing, which is a long-term investment strategy whereby one invests in wonderful businesses that have longstanding track records of paying increasing dividends to their shareholders.
We’re typically talking about blue-chip companies here.
These are companies that are so good at routinely increasing their profit, they’re left with a ton of growing money that they can’t efficiently reinvest into the business.
And so they share that increasing profit with their shareholders.
Those are dividend payments. As the profit grows, so do the dividends.
A company like McDonald’s Corporation (MCD) is a great example.
McDonald’s is selling far more Big Macs and Quarter Pounders today than they were, say, 10 years ago. More people buying more of their products means more profit.
Well, that increasing profit drops down to the shareholders in the form of a bigger dividend.
McDonald’s is essentially a golden goose that’s laying golden eggs. And they’re laying more golden eggs this year than they were the year before. They’ll also likely lay more golden eggs next year than they did this year. So on and so forth.
In addition, the value of that golden goose tends to increase in time, too.
As McDonald’s increases its profit, the value of the business rises.
Indeed, (just) the stock price of McDonald’s is up ~225% over the last 10 years.
Plus, the company’s dividend has more than doubled over that time frame.
So it’s a golden goose that’s worth far more than it was 10 years ago. And it’s laying far more golden eggs than it was 10 years ago.
That’s more wealth and more income. Also called getting your cake and eating it, too!
You can find more than 800 dividend growth stocks – some of them being really fantastic golden geese – by checking out David Fish’s Dividend Champions, Contenders, and Challengers list.
I’m a huge fan of this investment strategy because I personally used it to achieve financial freedom at 33 years old – and I didn’t even start saving and investing until I was almost 28 years old.
But by living below my means and investing all of my excess capital into really wonderful golden geese like McDonald’s, I’ve been able to build a real-life six-figure portfolio that generates five-figure growing passive dividend income on my behalf.
That’s a lot of golden eggs!
But I keep the geese. I don’t sell them off. I just let them do what they do best.
This same strategy could work for you, because you’ll ultimately need passive income to do what you want to do.
While the home remodeling could be just a one-off project, helping your parents will likely be an ongoing source of cash flow depletion.
And that’s exactly why you’ll want some golden eggs to pluck from.
However, the old saying about needing money to make money rings true.
These golden geese cost money upfront.
But high-quality businesses can take what money you invest in them and multiply that capital, in addition to pumping out the growing passive dividend income.
As such, you’ll want to really think hard about your current lifestyle.
There are probably areas of your spending that can be cut down on, which can generate excess capital that you can use to invest and generate that passive dividend income that will assist you with your goals.
I can tell you that I made some major cuts to my own spending in order to get to where I’m at.
Doing what I did – on a middle-class salary, no less – isn’t easy, especially over such a short time span.
Extreme output requires extreme input.
I moved across the country to make more money and save on taxes. I signed a lease on a smaller, cheaper apartment. I sold my car and rode the bus. I ate ramen noodles and sandwiches.
Now, you might not have to do these things. Your goals aren’t quite as extreme as mine. You’re not looking to retire in your 30s.
Nonetheless, you’ll want to build a framework in your budget that allows for enough wiggle room. You need to generate excess capital somewhere.
If you can’t cut expenses, you’ll then want to think about making more money. That could involve working more hours at your job, or you may need to get a second job.
Even just selling some stuff around the house could net thousands of dollars, which can be used to buy a golden goose or two.
The important thing to keep in mind here is that you need to generate excess capital. However you decide to do that is up to you, but high-quality dividend growth stocks won’t land in your lap.
Once you have some excess capital to work with, though, you’re not all alone.
We provide a ton of excellent content that can help you when it comes time to invest.
For instance, there’s a great series of articles on dividend growth investing that fellow contributor Dave Van Knapp put together.
These articles serve as individual “lessons” on dividend growth investing that, in aggregate, can help even a novice investor learn how the strategy works, why it’s so great, and how to successfully implement it.
And I write an article very Sunday highlighting an undervalued high-quality dividend growth stock for that week.
This is a weekly series that presents a long-term compelling investment idea to the community, free of charge.
It wouldn’t be that difficult for you to build out an extra $200 or so per month in passive growing dividend income, which can be used to help your parents on a regular basis.
This could potentially be accomplished within just a couple years, if you’re able to really maximize your excess capital production and invest it intelligently and regularly into high-quality dividend growth stocks at sound valuations.
But that process has to start somewhere, Elizabeth.
Time, which is a huge ally for a long-term investor, can work magic for you.
As such, you’ll want to strongly think about getting started immediately.
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.