There are three paths I follow with dividend stocks. Reinvesting, collecting, and trading. I have strict guidelines for each. I never ignore those guidelines. And, I have three separate accounts for these paths so that I can easily and accurately judge the progress of each.
Because I’m in my late 50s I have a minimum of a 3% dividend yield for those stocks I choose to invest in for the reinvesting track. The simple reason is I don’t have many years until retirement so I feel like I need to start with a higher dividend yield to compensate for the lack of years going forward. If you’re considerably younger and have time on your side, there’s no reason to set such a high hurdle for the starting yield unless that’s just your preference. I concentrate on those stocks that meet my 3% minimum and that are either at a low monthly close for the last year or more and are less than 30% above the 60 month (5 year) moving average, or meet the 3% minimum and are below the 60 month moving average. I plan to hold these stocks forever.
For the collecting track, I invest in those stocks that have at least a 1% dividend yield, are less than 30% above the 60 month moving average, and are at a low monthly close for the last year or more. In this path I’ll hold a stock and collect the dividends until the stock price doubles at which point I’ll sell half of the position to reclaim the original investment and then hold the remaining half as a permanent value holding. This can be used as a gradual method to create an emergency fund if you collect the dividends and don’t reuse them for investing. This path allows me to invest in attractive companies that don’t meet the 3% minimum of the reinvesting path.
I allocate a small portion of my capital to the occasional purchase of a dividend stock that has had a significant correction from it’s 5 year high close and look to sell for a small profit (15% or more) based on a monthly target scale that increase over time. These opportunities are fairly infrequent, and my goal is to sell these stocks within no more than 1 year. It’s very much a hit-and-run strategy. I only employ a small percentage of my capital per each trade, and I don’t use stops. Going in I’m prepared to hold these trades for as long as it takes to meet the target which has a maximum of 50%, even if takes years. I choose to view each trade in this path individually and not collectively as an averaging process. The basic idea for this path is to continue to reinvest the profits in the next trade as a means of compounding gains over and over again. My ultimate goal here is to create multiple “income” streams so that one or more are ongoing at all times.
I strictly adhere to “the #1 rule is don’t lose money” and “the #2 rule is never forget rule #1” mantra for all my investment paths. And, for most people I recommend the reinvesting and collecting paths over the trading path. They are the most forgiving, the easiest to manage, and make the best use of the “time is on our side” function of investing.
But, I find when discussing investing with people they almost always gravitate to the trading path. And I get it. It’s more exciting. But because trading relies totally on random short term price movements, it’s also very much like gambling. While my trading path is based on very high probability setups, there is absolutely no guarantee that each setup will perform in a timely manner. The market does what the market does, especially in the short term. So you absolutely have to understand that, acknowledge that, and prepared for that when trading. In other words, when trading I expect the worst and accept what happens when it happens. You can’t control the market so it’s useless to get upset if it doesn’t do exactly what you thought it would. You just have to accept what it gives you and move on. Only using dividend stocks in trading is my way of hedging against an uncertain outcome because if I’m forced to hang on to a trade for many months, even years, I’m collecting dividends while I do.
If I were forced to choose only one path, it would be the reinvesting track. It is an autopilot process. It makes the best use of time. And, it’s self-correcting in many ways. It is without a doubt the best way to create a substantial dividend stream over time, which is my primary purpose for this entire process.