Tuesday, February 26, 2019

The Phases of Dividend Growth Investing

Since I began dividend growth investing in September 2017, I've gradually noticed that there is a common evolution of dividend growth investing from an idea, into what eventually becomes a mindset, and even a lifestyle.

In my own life, I've noticed that since I discovered the concept of dividend growth investing and how I could leverage this concept to unlock financial independence at an early age, I have wholeheartedly adopted this idea as a mindset. I'm as passionate about dividend growth investing as some are about CrossFit and veganism.

With that said, let's take a look at how I believe dividend growth investing evolves from merely an idea, into a mindset, and even a lifestyle.

Phases of Dividend Income:

Phase 0: Theoretical phase

Every eventual fanatic dividend growth investor starts at what I like to call the "theoretical phase." This is the phase in which one experiences an epiphany. They one day randomly stumble upon the concept of passive income, and upon learning of this information, they are intrigued from the start. They will do more research and come to find that one of the absolute most passive forms of income to support a lifestyle are dividend growth stocks.

They then eagerly learn as much about dividend growth investing as they can, from the selection process of stocks, evaluation of stocks, and so on. Once a potential dividend growth investor reaches the end level of this phase, they then move into the next phase of this marvelous concept.

Phase 1: Practicality phase

When a potential dividend growth investor learns of the benefits of dividend growth investing, they begin to move from the theoretical phase into what I refer to as the "practicality phase." This is when someone simply becomes so eager to move from the theoretical phase of dividend growth investing, into the phase of actually implementing dividend growth investing in their own life.

They move on from the novelty of the hypotheticals of what an investment in X company 20 years ago would be throwing off in dividends now with dividends reinvested, to the point of actually desiring to make that hypothetical a reality. The practicality phase can't happen unless an individual embraces the idea of dividend growth investing. Although it's a very practical and near sure fire way to create meaningful passive income over time, dividend growth investing is often a slow process of accumulating fresh capital contributions, reinvesting dividends, and benefiting from dividend increases, often referred to as the trinity of dividend growth investing.

The amount that a would be dividend growth investor actually eventually invests in dividend growth stocks can range from investments of less than $100 (enabled with the recent rise of brokers such as Robinhood) to tens or even hundreds of thousands of dollars. Everyone discovers the concept of dividend growth investing at different phases of their life. Some may discover it at an early age in life, such as in middle school (like myself) or they may be in their 30s or 40s with a family even. This means that everyone starts at different investment amounts and becomes a DGIer to varying degrees.

In my case, I didn't start investing until I was 20. Being as young as I was when I began investing, I started with an investment of just over $2,000 in 6 different companies. It was this investment that would radically transform my mindset from one of hypotheticals into one of practicalities. This set the stage for the next phase of DGI.

Phase 2: Collecting Your First Dividend And Embracing DGI

Once I began investing in September 2017, shortly thereafter I received my first dividend from Genuine Parts Company (GPC). It wasn't much. I owned 2 shares at the time and collected $1.35 in dividends, but it was the beginning of that radical shift in my mindset. With every dividend I received thereafter, I became more and more convinced that dividend growth investing was my path from an employee to an owner; I viewed "harnessing the power of dividend growth investing to unlock financial freedom" as a mindset and a lifestyle. It's what ultimately led to the inspiration and motto of this blog. I began to think in terms of an owner rather than a employee/consumer. Rather than seeing $100 as a mechanism of acquiring goods/services, I began to see that $100 as a way of acquiring a share of Pepsi, two shares of Altria, or three shares of AT&T. In other words, the $100 could generate an immediate income of $3-6 in relatively safe, growing dividends for me in the years/decades to come.

With dividend growth investing, I realized that average, ordinary people were becoming financially independent over the course of years or multiple decades, depending upon how aggressively they invested in terms of the percentage of their salary they invested.

At a minimum, I believe DGI to be the practical solution to the retirement epidemic that America is facing. Rather than Millennials such as myself simply assuming that Social Security will be there for us when we reach retirement age (if it isn't drastically altered by then), the wisest course of action would be for us to start investing as soon as possible. If given 30-40 years, investments can compound considerably, transforming small contributions into massive piles of capital throwing off considerable dividends.

The best-case scenario for someone that aggressively saves 50%+ of their income and invests in quality, dividend growth stocks trading at fair or better prices for over a decade, is that they will be in a very enviable position in life, allowing them to focus on their passions rather than a paycheck. They will be financially independent or close enough that they won't be chained to a job they aren't engaged in, as is the case with over two-thirds of Americans.

It's the above information that enables me to feel the way I do about DGI. It is more than an investment strategy; it is a mindset that can free you from the obligation of a job that you don't feel engaged in, a boss that you dislike, or whatever it may be. You can truly be the architect of your own life when you are financially free

It's at the end of this phase that DGIers fully commit to the concept and lifestyle that accompanies DGI. I'm personally at this stage and will be for the next several years. They will continue to accumulate positions in dividend growth stocks for years before reaching the next phase.

Phase 3: Semi-Financial Independence/Continued Conviction In DGI Strategy

This is also a phase one can be in for several years or possibly even decades, depending upon how we describe semi-financial independence. This is the point at which one is actively collecting dividends that are becoming more and more meaningful with the passage of every month. It may be $100 here or $500 there, but the key takeaway from this phase is that an individual is starting to collect enough in dividends to enable either:

A) regularly reinvest dividends along with other fresh capital contributions to accelerate the path to complete financial independence.

B) use the dividends to pay for expenses or enjoy life.

C) some combination of the two previous situations.

Within this phase, the only thing that changes non-financially speaking is that the conviction in the DGI strategy continues to be reinforced as one collects dividends for simply owning shares in a company and continuing to survive. The bar for collecting dividends is really set that low; select quality companies at reasonable valuations and wake up in the morning, so to speak.

At this point, the strategy is really on auto-pilot and there is no need to radically change it. There may be some tweaks here and there to the selection and evaluation process of investing in dividend stocks, but the philosophy of DGI stays largely the same.

With the passage of several more years and the continued trinity of dividends, the investor will eventually transition into the holy grail of dividend growth investing.

Phase 4: Financial Independence

After a long, grueling road of investing and reinvesting tens of thousands or hundreds of thousands of dollars diligently, along with years of dividend increases from the quality companies in their portfolios, the investor has finally achieved the end-goal of financial independence. This phase is characterized by the freedom of the investor in question to pursue passions, hobbies, and interests at their own leisure.

If they work at a job they enjoy, they may continue to work, allowing them to continue to contribute fresh capital, reinvest dividends, and benefit from dividend increases on a magnitude that most can't even fathom.

This would allow them to reach potentially the uber wealthy phase of financial independence, in which abundance is a part of their lives. They could use this capital to fund philanthropic endeavors, political campaigns, or just continue to reinvest it.

If one works at a job they don't enjoy or find fulfillment in, they will probably have an idea of what they would like to do with free time by the time they reach this stage as it takes a minimum of several years and potentially decades to attain.

Whatever one decides to do upon reaching financial independence, the choice is absolutely theirs. They have earned their freedom after years of dedication to the very concept that made this life possible for them to begin with.


What phase of dividend growth investing are you at? How close or far away are you from Phase 4? Did I miss any phases, in your opinion? As always, I look forward to reading your thoughts and thanks for reading mine.


  1. I guess I am in the phase of increasing principles. Two methods: sell options and capital gains. It may be easier to achieve enough passive dividend income if I have enough money.

    1. DSFI,

      Thanks for the comment. Building up that capital is certainly important to achieving enough passive dividend income to support one's lifestyle.

  2. Great post, Kody! I found myself reflecting back to the time I stumbled on to dividend investing. It was very much like what you described in the first 2 phases. I started off as a value investor based on Ben Graham's rules in the Intelligent Investor. But then I received a dividend from GLW and started doing math on dividend investing.

    I really loved these 2 lines from your post:

    "I began to see that $100 as a way of acquiring a share of Pepsi, two shares of Altria, or three shares of AT&T. In other words, the $100 could generate an immediate income of $3-6 in relatively safe, growing dividends for me in the years/decades to come."

    It's so true. You begin to view sums of money in terms of how much income you can add. It is really a great motivator to save. Thanks for sharing!

    1. Thanks for the comment, RTC! Adding dividend income through earning extra income and/or reducing expenses is such a wonderful thing. DGI is a slow but sure transition from being an employee to an owner and that's one of the many reasons it appeals to me as an investing strategy.