How to get rich with dividend stocks

This post has my personal notes from the book “Get Rich With Dividends” by Marc Lichtenfeld.

1. We should view stocks as businesses and not ticker symbols. Most good businesses give back some of the profits they have made as dividends to the shareholders of the business. These dividends can serve as income or can be reinvested in the business to buy more shares. Reinvesting dividends creates tremendous wealth for the investor. This can be seen in the picture below:

Performance of S&P 500 with and without dividends reinvested

Investing in dividend stocks is the best way to make money in the stock market over the long-term. This is because of the following reasons.

  • Stock markets are very good investments over the long run.
  • Dividend stocks give better returns and lesser declines.
  • Stocks that raise dividends continually will give a good return even in declining markets.
  • Dividend stocks can help beat inflation over the long run.

The 10-11-12 system is a dividend stock investment system that will give 12% average annual returns and generate 11% yields after 10 years of investing.

2. Perpetual dividend raisers are companies that have an established trend of increasing their dividends year after year. They come in different varieties as shown below.

Perpetual Dividend RaisersThe average yield and dividend growth of Challengers is higher than Contenders, which is higher than Achievers.

  • The list of Dividend Aristocrats can be found here.
  • The list of Dividend Champions, Contenders and Challengers can be found here.
  • The list of Dividend Achievers can be found here.

Vanguard has an ETF based on the Dividend Achievers Index called Vanguard Dividend Appreciation ETFThis has a low expense ratio as well.

Investing in individual stocks gives you better control than investing in an ETF, but investing in an ETF may be more practical than investing in individual stocks for some individual investors.

3. The Dividend Aristocrats have outperformed the S&P 500 since inception in 1990, with lesser risk. This is shown in the figure below.

Dividend aristocrats return vs S&P 500 returnOne of the reasons why the Dividend Aristocrats outperform is because of increasing dividends which can be reinvested to buy more shares in bear markets, and ultimately create a lot of wealth. Investing in Dividend Aristocrats is also very easy and you do not have to do a lot of number crunching. You can find the latest list of Dividend Aristocrats from the S&P website.

4. The reason company raise dividends is simple. They have the money to do so. And in most cases, they have money because their business is doing well, they have higher quality cash flow and the management thinks the business is going to do well in the future. It also means the management is responsible and shareholder friendly. Sometimes stock buybacks can help investors, but raising dividends is the best of all.

5. When you buy perpetual dividend raisers like the Dividend Aristocrats, you are investing in great businesses. They, as a group will have reasonable capital gains over the long run. Because they raise dividends each year, you can reinvest more money to buy more of these stocks each year. And whether you have a bear market or a bull market, you win.

6. The author then talks about some other ideas. These are:

  • Closed end funds( mutual funds that trade like stocks)
  • REITs( real estate investment trusts)
  • MLPs( Master Limited Partnerships, often energy pipelines)
  • BDCs( Business Development Corporations which are similar publicly traded private equity firms)
  • Preferred stocks( like bonds)

I feel these are all complicated investments and you need to read and research a lot before investing in these.

7. There are certain rules you should follow when investing in dividend stocks:

  • Your investing time frame should be more than 10 years.
  • Dividends / operating or free cash flow ratio should be less than 75%
  • Look at the dividend growth rate and see if it is meaningful.
  • Do not include special dividends when calculating annual dividend growth calculations.

8. The 10-11-12 system works as follows:

  • The assumption is that the stock will appreciate 7.48% per year( historical average since 1961).
  • The pay-out ratio is 75% or lower.
  • The company should have rising sales, earnings and cash flow.
  • The yield should be 4%-4.7% or higher.
  • The dividend growth should be 10% or higher.
  • At least once a year look to see if the payout ratio has increased, or there is a decline in cashflow, earnings or sales or there is a change in dividend policy.
  • You can go to this website to calculate  future yields and total returns based on the variables you are going to enter.

9. Dividend reinvestment plans(DRIPs) and direct stock purchase plans(DSSPs) are usually more expensive ways of buying stock compared to buying through a discount stock broker.

10. The author then talks about covered calls and out-of-the-money naked puts. I feel these are again complicated stuff and not really necessary for simple and starightforward investing.

11. The above stuff relates mainly to US stocks, although somebody residing in a different country can use similar principles in their stock markets.

12. You also have to take into account taxes on capital gains and dividends and see how it fits into your investing world.

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