Why And How To Reinvest Your Side Hustle Money Into a Dividend Growth Stock
Individuals may have many reasons for investing. One can invest for capital appreciation, income generation, income growth, or any combination of those things. But above all, the goal of any investor is to eventually free themselves from having to work to cover living expenses, regardless of how that is achieved.
We believe the best way to do that is through investing in dividend growth stocks, such as the Dividend Aristocrats, as high-quality dividend growth stocks afford investors reliably rising income over time. In addition, dividend growth stocks tend to perform well from a capital appreciation perspective over the long-term, creating a powerful combination for those looking to stop working.
Finding money to invest in high-quality dividend growth stocks can take some discipline, but income from your side hustle is a great way to get started. In this article, we’ll take a look at the case for buying dividend growth stocks with your side hustle money, and how it can eventually help you stop working.
Why Buy Dividend Growth Stocks?
The case for dividend growth stocks is actually pretty straightforward. If we can find the best quality dividend stocks, hold them for the long-term, and reinvest the proceeds of dividends received, we have a proven way to generate wealth over a lifetime. The Dividend Aristocrats are a great place to start given they all have at least 25 consecutive years of dividend increases, and some have much more than that. This isn’t the only way to find a great dividend stock, but the Aristocrats are all proven winners that tick the boxes we want for great stocks to buy and hold for long periods.
If we can successfully buy and hold great dividend stocks, history tells us that we are well on our way to long-term wealth generation. Great dividend stocks provide several benefits to shareholders. One benefit is a rising share price. After all, great dividend stocks have to have rising earnings or they cannot continue to raise their dividends. Over time, rising earnings equal a rising share price.
Second, dividend growth stocks allow for compounding over time. This is simply the practice of reinvesting the dividends one receives in more shares, rather than withdrawing that cash from the account. In effect, this means the investor receives future dividends on the prior dividends received, juicing returns over time.
Ready to make your first $1,000 online? You can do it in less than 30 days with my absolutely free guide "Make Your First 1K This Month" Click here to get the guide.
Third, as we find great dividend stocks, it means our income on those stocks rises over time, as measured by yield on cost. That is the concept of measuring the income on the purchase price, rather than the market price. For instance, Lowe’s Companies (LOW), which is an outstanding dividend growth stock, has a current dividend yield of just under 2%.
However, because of the exemplary dividend growth the stock has shown, buyers of the stock just five years ago are receiving a 5.5% yield on their cost. That’s part of the power of buying great dividend growth stocks, and it isn’t unusual to see yields on cost in excess of 10% or more over long periods for Dividend Aristocrats.
When we put all of these factors together, the case for dividend growth stocks is quite compelling. Now, let’s take a look at how to execute on this strategy with your side hustle money.
What To Look For
The characteristics we want in dividend growth stocks are quite easy to define, which then makes it a straightforward process to find stocks that possess these criteria. First up, and perhaps most important, is earnings quality. This is the idea that a company’s earnings are resilient to competitive threats, recessions, and other external factors, but also that earnings are supported by cash flow. Dividends, after all, are paid from cash, so cash flow must be sufficient to continue to pay the dividend, and raise it over time. Great companies have no issues with this, so if a dividend stock doesn’t possess good earnings quality, it is time to look elsewhere.
Second, we want great dividend stocks to have meaningful recession resistance. This means that while earnings may decline during recessions, they don’t decline enough that a dividend cut is needed. Many sectors pay dividends, but some simply cannot support a dividend through a recession. When looking for a long-term dividend growth story, recession resistance is key to ensure your dividends aren’t cut.
Similarly, we want to ensure the payout ratio is sufficiently low to not only protect against cuts, but also to provide enough upside to see continuous increases. The payout ratio is the dividend divided by earnings, expressed as a percentage. The lower the better from a safety and growth perspective, and this is something investors should monitor for stocks they own over time.
Now, for a stock to have these characteristics, it also must have durable competitive advantages, and a management team that is both willing and able to return ever-rising amounts of cash to shareholders. Without durable competitive advantages, a company could see earnings fail to grow sufficiently over time, or could even see earnings decline during non-recessionary periods. If a company isn’t growing earnings at least as quickly as its peers, it likely does not have a sustainable advantage, and therefore, is likely not a stock we want to own for dividend growth.
Finally, the management team must be willing and able to return cash to shareholders for a truly great dividend stock. One famous example of a management team that was able, but not willing, was when Steve Jobs was still in charge of Apple (AAPL). He famously refused to pay dividends despite the company piling up cash at tremendous rates. Management teams must have both the cash to return to shareholders, and the willingness to do so.
Final Thoughts
While there are plenty of potential uses for side hustle money, we believe the best way to help grow that into long-term wealth over time is to buy high-quality dividend growth stocks. They offer several benefits, including capital appreciation over time, rising yield on cost, and passive income that increases every year through dividend increases. The key is to focus on the criteria that helps us find these great dividend stocks, and one place to start is with proven winners, such as the Dividend Aristocrats.
In doing so, side hustle money can grow over time, and eventually help the investor stop working and live off of passive income.
Ready to make your first $1,000 online? You can do it in less than 30 days with my absolutely free guide "Make Your First 1K This Month" Click here to get the guide.