The goal of every dividend investor is to one day accumulate a portfolio of income producing stocks, which would throw off a large amount of dividends every month. The goal of living off dividends
is achievable, but it takes capital, time, skill or luck in order to get to the magic point.
The magic point is where the dividend income exceeds the expenses of the dividend investor.
In a previous article
I discussed how investors can increase their dividend income, in order to reach their crossover point. It is very important to follow a few simple rules in order to create a sustainable dividend producing machine, which would produce dependable income for decades.
First, investors should focus on companies which have a long history of paying and raising dividends. I typically look for companies which have increased dividends for at least ten years in a row
Second, investors should make sure that these companies are trading at attractive valuations
. Paying a P/E of over 20 would lead to poor results, as investors in Coca-Cola (KO
) and Wal-Mart (WMT
) learned a decade ago
Third, investors should make sure that the company's dividend is sustainable
out of earnings or cash flows. I typically look for a dividend payout ratio of less than 60% for ordinary stocks.