I’m an advocate of dividend growth investing as a great strategy to help investors reach an ultimate goal of financial independence. Building up a portfolio of assets (shares of dividend growth stocks) that pay out an annually increasing amount of passive income (dividends) is one of the greatest ways to reach a point where you no longer have to rely on wage income to cover your living expenses. If you stick to a well thought out plan, eventually you will have a large enough portfolio that the dividend income you are paid will cover all of your expenses and let you afford to have some fun as well.
Not for Everyone
However, the dividend growth strategy is not for everyone. These past few days where the S&P 500 has declined a fairly quick 2.6% shaving off hundreds or even thousands of dollars from investors portfolios is a reminder that not everyone can handle dividend growth investing. Following are some of the reasons I would say you should not be a dividend growth investor:
You don’t want to do the proper research. Dividend growth investing involves purchasing shares in individual companies. You need to do a proper analysis of each company you want to own to make sure you aren’t paying too high a price or that the company doesn’t have some underlying problems causing a future downfall. If you don’t have the time or don’t want to do the research, I would suggest sticking with a dollar cost averaging plan investing in low cost index funds.
You can’t handle large market swings. The truth is long term investors need to be able to tolerate large market downturns. Investors should expect to experience market corrections of at least 20% every few years and even downturns of 50% or more a few times in their investing lifetimes. If you can’t hold steady to your investing strategy when the market is going down, if you are going to panic and sell your stocks when the market is going down, then I would suggest you should find another strategy for building wealth. If you can stay strong through market downturns, if you believe a market correction is a buying opportunity rather than time to sell and if you understand that over the long term the market will recover and begin to make new highs once again, then you should be good to go for dividend growth investing.
You don’t have the rest of your financial life in order yet. Do you have high interest debt? Are you living above your means by spending more than you earn? If the answers to these questions are yes, then they need to be addressed first. You should have no high interest debt, have an emergency fund established, live within your means and have proper insurance coverage all before thinking about dividend growth investing. Get your financial life in order and then start putting as much as you can into dividend growth stocks.
You won’t be able to ignore the noise. Do you watch the news, read the newspapers, read articles online or follow the stock market pundits on CNBC? When they are shouting doom and gloom will you be able to ignore them and stick to your plan? To be a dividend growth investor you need to be able to ignore the noise, make your own rational decisions based on your own research and stick to your plan no matter how loud the media is screaming about financial ruin for the world.
You want to be a trader. Dividend growth investing is for the long term. If you are going to constantly buy and sell stocks after owning them for just a few days, months or even just a couple years then I would suggest you should instead invest in index funds. Investing for the long run, not market timing by jumping in and out of stocks, is the best way to build wealth. Dividend growth investors should buy stocks with the expectation of owning them forever. There are only a few reasons to sell dividend growth stocks. Otherwise investors should be looking at owning their shares for the long term collecting dividend income along the way.
Let’s face it, some people aren’t cut out to be dividend growth investors. Either they won’t have the patience, they will panic and sell at the wrong times, they won’t want to do the research required for investing in individual companies, they aren’t financially ready yet or they won’t have the proper discipline to stick with a plan. If any of these describes you, then I suggest looking for alternative investing strategies. There are tons of ways to invest your money for the future. Real Estate, index investing, bonds and many more ways one can try to reach financial independence. Figure out a strategy best suited to your individual temperament and get started.
What other reasons might dividend growth investing not be for everyone? Share your thoughts in the comments!