Get Rich with Dividends, 2nd Edition

CHAPTER 8 The 10–11–12 System

Now it's time to put all of this knowledge to work and create a portfolio that is going to generate increasing amounts of annual income and create real wealth over the years.

The three important criteria in picking dividend stocks that, in 10 years, will generate 11% yields and 12% average annual total returns are:

• Yield
• Dividend growth
• Payout ratio

Yield

As we discussed, you don't want to chase yield. Never buy a stock simply because its yield is attractive. That being said, yield is a critical component of investing in dividend stocks. Starting out with a high enough yield will be vital to reaching your goals.

Just as, on one end of the spectrum, you wouldn't buy a stock with a 10% yield that was not growing or was unsustainable, you also wouldn't buy a low-yielding stock just because it was growing the dividend rapidly and the dividend appeared safe.

A low yielder might be attractive if it's a stock you're interested in for capital growth (you think the stock price is going significantly higher), but you wouldn't buy it for income.

Obviously, any stock you buy, even if it's for income purposes, you'll buy because you think that, over the long haul, its price will rise. If you think a company is a dog in an obsolete industry, you probably don't want to own it regardless of its historical dividend increases. If you believe the company is in trouble, you won't be able to sleep at night. And letting you sleep at night is exactly what the kind ...