So many people are interested in dividend investing these days and why not, the fact that a company pays out a percentage of its earnings to the shareholders is really appealing and is sort of the entire point of the stock market itself. Dividends have a huge compounding effect on wealth and many retail investors just don’t realize how powerful that effect can be if implemented correctly.

In today’s video I’m going to introduce you to what’s probably my favorite dividend growth investment strategy. This strategy is going to generate a minimum of 12% annual returns, if you execute it correctly using the steps I’m going to share with you today. So stick around because I think today’s video is going to be really, really special!

INTRODUCTION

Before we get into the details and strategy rules let me walk through why this strategy is so amazing.

Lets imagine that you buy shares of a stock with a 4.5% dividend yield and this company raises its dividend by 10% each year. After 10 years this stock is no longer paying a 4.5% yield on the shares you are holding, its now paying you a 10.6% yield.

After 12 and a half years the company has paid you back your entire cost basis. Those shares you purchased 12 years ago are basically free/costless. Your cost basis is now negative and every dividend you receive from here on out is 100% profit.

By year 15 these shares are now paying you a 17% return every year. In year 18 you will have collected so many dividends that the company has now paid you back double your original investment.

By year 20 those shares will be paying out a 27% average return every single year. By the time you have reached year 20 your dividends will have paid you back 250% of your original investment. Keep in mind this 250% does not include any capital gains. Even if the stock traded flat for 20 years you still received a 250% return on this investment.

Once you understand the math behind this system a lightbulb should immediately go off in your mind to the wealth creation possibilities here.

THE STRATEGY

The strategy I’m going to teach you today is called the 10-11-12 System. It was created by Marc Lichtenfeld. Lichtenfeld is the chief investment strategist at the Oxford Investment Club. His book, Get Rich with Dividends was an instant best-seller when it was released in 2016.

The 10-11-12 System is a dividend growth strategy that places very specific rules around investing. If you implement the program correctly then you can expect your portfolio to earn 12% annual returns and 11% annual dividend yield after 10 years.

DIVIDEND GROWTH IS THE KEY

To use this strategy you need to ensure you travelling in the correct universe of stocks. You don’t want to be trolling around the growth stocks solar system to find the planets we’re looking for. For this to work you need to start by first finding companies who are paying dividends and, who are perpetually raising their dividends each year.

Luckily this idea of exponential dividend growth has been around a long time now so there are some indices we will get to know really well. First up we have the Dividend Aristocrats. In order to get your company on this distinguished list you must meet the following criteria:

Must already be listed on the S&P500 Index
Must have increased your dividend every year for the last 25 years in a row
Must have a market cap of at least $3b
Must have a daily average trading volume of $5b for 6 consecutive months

In addition to the Dividend Aristocrats there are some other indices you can also examine for prospective dividend growth stocks:

The Dividend Champions – Annual dividend is also raised every year for 25 years but doesn’t have to be listed on the S&P500 index
The Dividend Achievers – Annual dividend must be raised 10-24 years in a row, and meets some liquidity requirements
The Dividend Contenders – Annual dividend is raised 10-24 years in a row, no liquidity requirements
The Dividend Challengers – Annual dividend is raised 5-9 years in a row.

The Rules of the 10-11-12 System

The first step is to sort the 2021 Dividend Aristocrats by Annual Dividend Yield, highest to lowest.

The dividend Yield MUST be 4.7% or higher (4% is the floor, nothing below 4%)
Payout Ratio MUST be less than 75%
Annual Dividend Growth Rate should be over 10%
Prefer stocks where the 5/10 ratio is greater than 1.0 (divide 5 year dividend yield by 10 year dividend yield to get 5/10 ratio)

Remember that our universe of opportunities is fairly small. If we limit ourselves to stocks that pay out 4.7% we have just 7 options.

Exxon
AT&T
Chevron
Fed REIT
Peoples United
Reality Income Corp
ABBVIE

Lets use ABBV here because I personally own some ABBV shares and ABBV is a company that I have spent some time investigating. We can see that ABBV is paying $5.20 per year per share they are holding of ABBV. Which gives us an annual dividend yield of 4.74%, just over our 4.7% threshold.

Researching Compatible Stocks

Lets go to Seeking Alpha and see if this stock meets our rules or not.

Click the Dividends Tab. Then the Dividend Scorecard Tab.

The Payout Ratio needs to be less than 75%.

Click the Dividend Growth Rate needs to be over 10% annually so click the Dividend Growth tab. For whatever reason there is no value yet for the 10 year rate but we see that in the 1, 3, and 5 year period the growth rate is above 10%, which is perfect.

The last thing we want to do is make sure the company itself is successful and the dividend isn’t a fluke or a warning sign so we want to check the financials to ensure the company has rising sales, earnings, and cash flow.

The financial statements on Seeking Alpha are gimped by a paywall so you can’t see the full picture but you can do a quick glance to be sure the recent numbers look good.

Once a year you’re gonna want to check up on all your holdings and make sure they haven’t been kicked off the Dividend Aristocrats and make sure they still meet the criteria. If they no longer meet the criteria then sell the positions and move into whatever new positions you can find that meet the requirements.

FINAL THOUGHTS

So here’s some closing thoughts.

This strategy is best for people who prefer to save all their money in a risk free investment throughout the year and then make one since investment each year. If you do this then each year you can investigate the best opportunities, make the purchases, and then lock in your cost-basis and dividend yields.

This strategy is not super great for dollar cost averaging because the dividend yield that you lock when you buy shares is changing, along with your cost-basis and that can be a pain to track and manage.

As a strategy though, I think this one is fantastic. You just need to remind yourself that the companies you are holding in this portfolio are for the dividends, not the capital gains. If you are the type of person who is constantly checking your brokerage and get high blood pressure when you see red then this strategy is most definintely not for you.

If you let them, these dividends and the persistence of time will make you very, VERY wealthy.

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Recommended Books

Get Rich With Dividends (Marc Litchenfeld)
A Random Walk Down Wall Street (Burton Malkiel)
The Simple Path to Wealth (JL Collins)
I Will Teach You To be Rich (Ramit Sethi)

Please consider buying any of these books as audiobooks from Audible.com!

Best Dividend Growth Strategy of 2021 | 10-11-12 System