📈 Building a Dividend Growth Portfolio from Scratch
An important foundation for passive income..
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The idea of passive income has always fascinated me. Living your life — exactly how you want — and making money while you do it.
The ~2,500 of you who were here from the start might remember this post I shared detailing why I invest and how I plan to build generation wealth throughout my lifetime. If you’re new to investing — or just want a good read — check it out.
This post will be similar, but come from a place rooted in statistics and excitement.
Just so we’re all on the same page — we believe the stock market has not bottomed. We also believe the stock market is headed lower (SPY ~3,200) — and might stay there for an extended period of time. This would be similar to what we experienced between October 2001 and October 2005.
At the end of that four year stretch, the stock market traded up a whopping +10.5% (assuming there was no reinvestment of dividends).
Four long years — and if you had your money parked in a broad-based index fund, like the S&P 500, you’d have only seen +10.5% gain on your investment.
I don’t have a crystal ball. I have no idea if the stock market will be red or green tomorrow, next week, next month, or even next year. However, I do have a solid understanding of financial statements, secular growth trends, and the power of an experienced management team.
I also have a solid understanding of what this quote means..
“You make most of your money in a bear market, you just don’t realize it at the time.” — Shelby Cullom Davis
We’ve published a lot of research about past bear markets — their average duration, drawdowns, P/E ratios — and have even shared a checklist of sorts.
With that being said, I’m very much focused now on preventing “stagnation” in my portfolio — something that would have happened between the years of 2001 and 2005 if I were simply investing into the S&P 500.
I believe we’re being, and will continue to be, presented with a rare (once-in-a-decade or more) opportunity to invest into wonderful businesses at wonderful prices — assuming a long enough time horizon.
For example, 3M (MMM) just the other week — when we covered the stock on Seeking Alpha’s Stock Market LIVE — was trading at $105 / share. The company sells over 55,000+ products, is operating out of 65 countries, and employs over 88,000+ people. They’ll do $34B in revenue next year, with $5.8B of that floating down to the bottom line.
They’ve been paying a growing dividend to their shareholders for 63 years in a row. Below is a short timeline showing how they’ve grown their dividend throughout the last decade —
2012 — an increase of +7.3%
2013 — an increase of +7.6%
2014 — an increase of +34.7%
2015 — an increase of +19.9%
2016 — an increase of +8.3%
2017 — an increase of +5.7%
2018 — an increase of +15.8%
2019 — an increase of +5.9%
2020 — an increase of +2.1%
2021 — an increase of +0.7%
Their average growth rate over the last 20 years is +8.6%, with that figure moderating to +5.1% over the last 5 years (compounded annually).
I know all about the lawsuits and earplugs — simply using 3M, a wonderful business, as an example here.
To put all of this in perspective, at $105 / share the company’s forward dividend yield jumps to 5.3% — historically this figure hovers around 2.3% or so. I understand the risks with the lawsuits — we went into immense detail in our episode — but bad news paired with a broad market sell-off is presenting a potential opportunity for a lifetime of passive income.
Yield on Cost
I would not consider 3M a “dividend growth company” by any stretch of the imagination. But Lowe’s (LOW) is — they’ve been growing their dividend by +19.5% compounded annually over the last 5 years.
In 2008 their dividend per share was $0.29 — today it’s $4.20 per share. That’s a 14.5X in the amount of passive income you’d be making over a 14-year period of time.
Think about it like this — $10,000 invested into Lowe’s in 2008 would have given you 500 shares at $20 / share. Those 500 shares would have paid you $145 in annual dividends in 2008. Today, those same 500 shares would pay you $2,100 per year.
Not only would you have received $10,000 in cumulative cash dividends (all of the money you invested) between 2008 and 2022, but you’d also have an asset paying you 21% annual cash-on-cash returns against your original investment.
It’s kind of like owning a rental property — own something that both appreciates in value and pays you more and more every year.
This is the concept of investing into dividend growth stocks.
Lowe’s stock price appreciated in value from $20 / share in 2008 to $250 / share at the end of 2021 — today hovering around $195 / share.
Lowe’s isn’t alone — there are dozens, if not hundreds of companies that have done the exact same thing over the last 14 years.
But here’s the secret — that $10,000 in cumulative dividend payouts drops to only $5,940 over the same period of time if you bought Lowe’s stock at only $35 / share instead of $20 / share.
Lowe’s traded above $30 / share for years before the bear market in 2008 — but only those who weren’t scared to buy in the midst of terror were rewarded. Only those who accumulated stock in wonderful companies at wonderful prices were rewarded with nearly twice as much in passive income.
Investing in Certainty
Sure, over long periods of time the S&P 500 goes up +8% annually after accounting for (historical) inflation — we’re on the same page.
However, it’s very difficult to ignore what the Federal Reserve is doing. It’s very difficult to ignore what’s happening in Europe. It’s very difficult to ignore the war in Ukraine. It’s very difficult to ignore runaway inflation.
What I’m trying to say is that there are currently countless reasons as to why stock prices might experience heightened volatility. So far this year we’ve seen three bear market rallies, and we’re currently in our fourth.
If instead of investing into dividend growth stocks (companies who pay a growing dividend), I instead invested into the Nasdaq — assuming we are indeed in some prolonged recovery — I might go years without seeing meaningful returns.
I’d much rather invest into a few dozen businesses of whom I know are capable of growing / maintaining their revenue during a recession — with ample free cash flow to pay and grow their dividend.
I’m not saying to ignore promising tech stocks — I’ll never say that.
I’m saying we’re seeing — or are going to see — some very rare opportunities to invest into wonderful companies who are paying and growing their dividends in a meaningful way as this bear market finds a bottom.
And I have every intention of taking advantage of this opportunity.
I plan to invest tens and tens of thousands of dollars toward this opportunity — updating you every step of the way.
My Favorite Dividend Growth Stocks
This list will change over time. Today, it’s a mix between companies aggressively growing their dividend as well as companies with an above-average dividend yield.
My goal in sharing these names isn’t “buy, buy, buy!” — but instead transparently sharing with you all where my head is at.
Don’t get me wrong, I’m incredibly excited about the future of cybersecurity, fintech, healthcare — and countless other companies we’ve highlighted. However, it’s becoming harder and harder for me to ignore such an awesome opportunity — to pick up equity in wonderful companies at wonderful prices.
Name & their 5-year dividend growth rate (CAGR)
Lowe’s (LOW) — 19.5%
Kroger (KR) — 12.9%
Realty Income Corporation (O) — 4.0%
American Tower Corporation (AMT) — 17.8%
Snap-On Inc. (SNA) — 14.8%
Tractor Supply Company (TSCO) — 26.3%
Broadcom (AVGO) — 32.1%
Home Depot (HD) — 17.0%
Visa (V) — 17.8%
Corning Inc. (GLW) — 11.8%
Union Pacific (UNP) — 15.4%
Williams-Sonoma (WMB) — 8.9%
Taiwan Semiconductors Manufacturing (TSM) — 10.2%
Academy Sports and Outdoors (ASO) — N/A
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
Love the content Austin! Have helped me learn so much over the last few months.