Building wealth via dividend reinvestment is easy. Yes, you heard me right, it’s easy. It’s easy as long as you follow certain rules and buy only the best long term dividend stocks. Note, I never said it doesn’t take tremendous patience and sacrifice. It takes those characteristics in large quantities.
Keeping your eyes on the prize as your account slowly compounds itself is the number one key to building wealth via dividends.
Countless investors give up early for short term gains. They see a must have sports car, once in a lifetime vacation, or any other number of wealth killing reasons, tap the account, and have to start from square one.
Here are must follow rules to build wealth via dividends.
- Cut the losers
This is critical. If one of the companies in your portfolio starts to cut its dividends, cut the company from the portfolio. Never get emotional about stocks. Dividend cutting is a very bad signal from a company and to hold onto the stock despite the signal can be foolhardy. Sure, the company can recover, but the odds are, once it starts the downward spiral it will keep on dropping. Investors are much better off selling these companies at the first sign of trouble and reinvesting the proceeds into new names or adding to portfolio companies.
- Understand free cash flow
While it’s important to understand all the financial metrics on the balance sheet, free cash flow is often overlooked and critical for dividend investors. The key is to understand how much cash was spent on dividends then compare this number to the free cash flow. The best long term dividend stock’s free cash flow always pays out less in dividends than the free cash flow number.
- Diversify
Check your portfolio. Make certain you are not overly weighted in any one sector. This is easy to do because certain sectors like REIT’s pay out high dividends. Diversification makes certain that should a certain sector be hit by selling, the other stocks in your portfolio will counteract the downside.
Source: http://tradingtips.com/daily/dividend-stocks/building-dividend-wealth-easy/