Have you heard of the magic of compound interest? It's been called the eighth wonder of the world, and it can be an extremely powerful wealth-creation tool. Compounding allows a sum of money to grow faster than simple interest since you are earning returns on top of returns. By investing in dividend stocks and reinvesting your dividends, also known as a dividend reinvestment plan (DRIP), you can harness the power of compounding.
Although I generally focus on growth stocks, my heart has a soft spot for dividend growth investing, and a portion of my portfolio is dedicated to dividend stocks. In fact, "FIRED" in FIRED Up Wealth is an acronym meaning "Financial Independence Retire Early w/Dividends." Traditional dividend growth investing, also known as DGI, is geared toward the growth of the dividend annually to outpace inflation. DGI is often used by income investors, especially in retirement or early retirement.
I like to focus on what I call "Dividend Growth Investing for FIRED stocks," also called DGIF stocks. This is a term I created to identify stocks focused on total growth, meaning the growth of both the dividend and the appreciation of the share price. Here are my general guidelines for DGIF stocks:
- A 3% dividend or less in most cases. You want this low. Dividend yield is good, but you want the company to have cash to invest in growth of the company as well.
- A low dividend payout ratio of 50% or less, and the lower the better. I usually prefer 35% or less.
- Five years of dividend growth or more. The more consecutive years, the better.
- At least 10% growth in that five-year period, and the more the better.
- Ten-year annualized growth of 10% or more per year. Of course, the higher the better.
These metrics help ensure total growth for your investing portfolio. Of course, additional analysis and due diligence is required before making any investment decisions. In the below video, I provide my top DGIF stocks to buy now for July 2021, as well as high-level analysis. Stocks like Apple (NASDAQ:AAPL), John Deere (NYSE:DE), Lam Research (NASDAQ:LRCX), and more! Watch to see the other picks -- plus a bonus stock -- and why I think these stocks are reasonably priced to buy now.
*This video was published on July 1.