Yield

As we discussed, you don’t want to chase yield. Never buy a stock simply because its yield is attractive. That being said, it’s a critical component of investing in dividend stocks. Starting out with a high enough yield will be vital to reaching your goals.

Just as, on one end of the spectrum, you wouldn’t buy a stock with a 10% yield that was not growing or was unsustainable, you also wouldn’t buy a low-yielding stock just because it is growing the dividend rapidly and the dividend appears safe.

A low-yielder might be attractive if it’s a stock you’re interested in for capital growth (you think the stock price is going significantly higher), but you wouldn’t buy it for income.

Obviously, any stock you buy, even if it’s for income purposes, you’ll buy because you think that, over the long haul, its price will rise. If you think a company is a dog in an obsolete industry, you probably don’t want to own it regardless of its historical dividend increases. If you believe the company is in trouble, you won’t be able to sleep at night. And letting you sleep at night is exactly what the kind of stocks I’m talking about in this book are designed to do.

A company with a 1.4% dividend yield that has a low payout ratio and is raising its dividend by 10% per year is not going to get you where you want to go.

Even with a 10% dividend boost every year, your yield will only be 3.3% in ten years.

That’s not a terrible yield to start out with today, but we want much more than that ten years from now.