Dividend Growth Trading

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There are many ways to make money investing. When it comes to investing in the stock market, one of the most popular and attractive strategies to utilize is the Buy and Hold approach. For those on the journey to early financial independence, passive income is the name of the game and we all aim to achieve the following:

Passive income > monthly living expenses

By meeting the above criteria, by definition we are financially free!

Dividend Growth Investing

In an attempt to earn passive income, many freedom fighters turn to Dividend Growth Investing (DGI). In a nutshell, DGI approach relies on the following principles:

  • Primary focus of investor is on growing a passive income stream.
  • Purchase large cap blue chip companies with strong economic moats to better insure safety and stability (especially during economic downturns).
  • Typically aim for a starting dividend yield of > 2.0% for non-growth stories (e.g. JNJ, CVX, PG, KO, etc.) and > 1.0% for growth stories (V, SBUX, AAPL, etc.).
  • Tune out the noise and employ the aforementioned Buy and Hold approach. Make regular investments and ignore market price fluctuations. Buy more shares on market dips.
  • Emphasize growth as it pertains to dividend growth (NOT capital gains). Dividend Aristocrats (Champions), Contenders, Challengers, etc. are favored because these companies have shown a commitment to growing and increasing the dividend every year.

By following this approach to wealth building, dividend growth investors typically stay fully vested in the stock market at all times. Frequent trading is not encouraged because selling off positions is akin to cutting branches off of your dividend fruit tree. Again, the emphasis is on growing the passive income stream, not readily consuming the fruits of your labor before they are fully ripe (ripe in the context of passive income > monthly expenses; in other words, full financial independence status). Further, the DGI methodology is predicated on an investor building a passive income stream gradually over time; this is NOT a shortcut way to help you become an instant millionaire.

If we were to use a tortoise and the hare analogy, most certainly, DGI makes use of the tortoise approach.

Situations Change

When I first started investing in 2012, I was purely a DGI. At that time, this style of investing made the most sense to me as I was a young investor just starting out and I had very limited capital to work with. The barrier to entry with DGI is also extremely low (you don’t need hundreds of thousands of dollars to get started) which makes it most appealing.

The DGI method is absolutely a great one, and I won’t try to deny that for a second. But I will add this point — Every investor’s situation is unique. Ultimately, we have to pick and choose the approaches that are most appropriate and best suited for our own needs.

Now that I am on the cusp of becoming a net worth millionaire, hold over $1MM in debt, and feel like the stock market is overstretched at this point in time, I have to be very careful with how I choose to invest my capital, moving forward.

As I’ve mentioned before in the past, I am exiting out of the Rapid Asset Accumulation Phase, and entering into the Wealth Preservation Phase now. Market gyrations (and crashes) will have a profound impact on my overall portfolio, and because I am encumbered with so much debt, I must take great strides in treading carefully. After all, investing is never without risk.

Although I greatly appreciate the merits of DGI, I will have to take an altered approach at this time…

Stay Adaptable

I’ve always believed that the best investors are the ones who remain the most adaptable. It’s wonderful to learn what we can from experts who have “been there and done that” but in the end, no one else is walking in our shoes and investing for our own needs; we must take on that responsibility ourselves.

It’s very dangerous to assume that just because another investor has had a ton of success investing a certain way in the past that our future results will be exact mirror images.

In the DGI community, there are many brilliant, sharp minds out there, but many newbies just starting out are almost dangerously following the consensus opinions of others, blindly.

They say to never fall in love with an investment, but one doesn’t have to venture very far on community threads like Seeking Alpha to find commonly spewed rhetoric such as the following:

GILD (Gilead Sciences) is a misunderstood company. Let me try to describe it. It’s a bleeding edge, earth shaking, game-changing, miracle, extremely profitable, market leading, world dominating, and much more awesomeness to come kind of a company.

GILD is a stock that is doing very well at the moment. I owned 100 shares myself. But from an outsider looking in, you can easily see how destructive this type of mentality can be for an investor to have! Surprisingly (or not), many stocks out there have developed a cult-like following; there are investors who will walk the ends of the earth in support of their favorite companies, investing every step of the way. It’s as though these companies can do no wrong… Seriously, not every company out there is a “wonderful business”, as is often touted by overzealous followers.

Another rigid approach towards “knowledge sharing” that is frequently performed on these threads is for a seasoned investor to try and “impart wisdom” to the new-age crowd by continuing to tout the greatness of a previously successful investment:

An investor who purchased 100 shares of JNJ in January of 1984 would now own 2453 shares, today. A $4000 investment would be worth $253k today. The divided received would be $6868 dollars, this year.

Well, here’s a couple that invested in Apple (AAPL) stock back in 1998 and has made close to $1MM

You’ll always be able to cherry pick some data to help support your thesis… I’ve made over 200% in leveraged returns on each Bay Area rental property I bought over these past 3 years… but just because that strategy worked back then, it does NOT imply that it will work again moving forward!

We must stay adaptable and progress with the times. I’m not saying JNJ isn’t a high-quality investment (even today), but past performance doesn’t guarantee future results…

So, filter accordingly and never become that blind sheep. 😉

My Conundrum

With that said, I’ve tried to take what I can from DGI as I work towards building a more suitable investment strategy for my own current needs. As I’ve alluded to in previous posts, my preference these days is to hold a lot of cash.

Recently, I’ve been making efforts to liquidate a huge portion of my dividend growth portfolio. Prior to the firesale, I had over $100,000 invested in my taxable account, and it most recently looked like this:

Screen Shot 2015-05-12 at 8.12.54 AM

So, in one sense, I wanted to earn passive income through the form of collecting dividends, but I also didn’t want to stay invested in the stock market for long durations of any given time, since I didn’t want to risk my underlying principal.

At the same token, I also realized that stuffing $200,000 (funds from my 2 cash out refis) into the bank would earn me next to $0 in interest…

As usual (like most things in life), I found the best compromise somewhere right smack in the middle…

Dividend Growth Trading

Enter Dividend Growth Trading (DGT).

We take the best elements of DGI and we fine-tune it to fit our own specific needs. What are my own specific needs?

  • Hold cash most of the time.
  • Earn some interest on principal.
  • Safe and secure investments (as much as possible, which is why we are sticking to dividend growth stocks).

As you can see from my criteria above, there is no mention of long-term capital gains. That’s because I’m relying on my rental properties for that, so for once, long-term appreciation really is “icing on the cake”. Actually, scratch that. Just hold the icing entirely… I’m going to forego it with this new investing approach. There will be no speculation on any long-term appreciation plays; we will try and realize short term profits immediately!

What we are doing now is instead of investing in the stock market at all times, we are simply going to buy dividend growth stocks on the dips that occur along the way. Since the market is highly volatile and fluctuates wildly from trading session to trading session, that will help us achieve our objective quite naturally. When the stocks inevitably pop back up, we will take our profits and liquidate our positions.

That’s right… We will buy stocks and later sell them for a profit; “Buy low and sell high”. The profits will add up and constitute our active income.

Since Dividend Growth Trading involves trading stocks, it’s not passive income! Also, DGT is a little bit more cutthroat; we are in the interest of making a quick buck, not forming an attachment or affinity with any single investment.

But that might be a good thing… This allows an investor to focus on the main objective of making money as opposed to falling in love with a stock (which as mentioned above can be a very dangerous thing).

Prior to taking on the DGT approach, I was planning on earning the following dividends in 2015 for the previously mentioned $100,000 stock portfolio:


As you can see, based on my dividend holdings, I was anticipating earning $1,897.92/year, or $158.16/month in passive income for 2015.

To achieve these results, I would have had to do nothing more than wait patiently for a year and stay fully vested in the markets.

But because I desired to exit out of the markets, I’ve been slowly selling out of positions. Granted, I can’t time the market, but I tried to sell at reasonable prices (more than what I paid for).

Here are the results thus far:


I still hold positions in AT&T (T), Starbucks (SBUX), Toronto-Dominion Bank (TD), Coca-Cola (KO), and Alibaba (BABA). The sales of Emerson Electric (EMR) and American Express (AXP) were also not intended for profit-taking, as I made these sell calls at the time to swap the proceeds into other stocks (CELG and O). Hence, the realized gains and returns are especially low with these moves… Also, CELG is highlighted in yellow because it’s purely a growth stock that does not pay a dividend at this time (my original intention). CELG would not be the most suitable stock for trading, moving forward with the DGT approach…

Nevertheless, in a span of ~5 month (assuming a start date of January when shares were first purchased), I’ve already been able to realize $2,542.24 in short-term capital gains. Yes, I will have to pay some hefty taxes on the profits, but regardless, I’ve already been able to surpass my dividend target of $1,897.92.

The best part? Just like I wanted, I got to pull out a bulk of my principal back out of the stock market, and convert it back to cash.

So, the argument that “cash earns no interest” can be remedied if we elect to partake in DGT, and only “play in the game” for certain durations, or small intervals at at time.

At this point, really, I could stop trading for the remainder of the year… I’ve already exceeded my passive income target through actively employing DGT.

More Income?

But let’s suppose that we wanted to keep trading to earn some more active income.

For a hypothetical $50,000 portfolio, here’s what an investor’s objective might look like:

Principal $50,000
Size of Each Position: $5,000
Number of Positions: 10

Monthly Income Objective: $1,500
Monthly Return on Investment: 3.0%
Annual Return on Investment: 36%

In the interest of safety and diversification, we will divide up the $50,000 position in 10 blocks of $5,000. This will allow us the capability to purchase and hold up to 10 stock positions at any given time. The objective with this active investing approach is to achieve a monthly return of 3%. In other words, I want to earn $1,500/month in “interest” payments.

Over a full year, this computes out to a 36% return, or $18,000 of capital gains on the underlying principal of $50,000.

Are these goals aiming too high and altogether unrealistic?

Probably… But I guess there’s really only one way to find out…

When to Sell?

When is it time to bid fare thee well to a stock? There’s no magic formula, but my own preferences are illustrated below.

How do I determine at what price to sell?

Well, for a goal of $1,500/month in active income, this works out to require 6 total sell transactions each month (out of 10 maximum held positions at any given time), or a profit of $250/sell.

Leaving some buffer for fees and commissions, I settled on a target of 5.5556% return on each sale, or profits of $277.78 (for $5,000 investment).

Here’s a table that I put together, showing various sell prices needed to capture targeted gains:


When purchasing stocks around the $90 range, I will need sell for about $95, for a net profit (delta) of $5.0/share. Doing so will net me ~$277.78 before fees and commissions. This is ~5.5% return on the $5,000 investment.


When purchasing stocks around the $27 range, I will need sell for about $28.50, for a net profit (delta) of $1.50/share. Doing so will net me ~$277.78 before fees and commissions. This is ~5.5% return on the $5,000 investment.


Guys, I’m just joking about the 36% annual returns (sniffing anything close to 10% over a full year would well exceed my expectations)… But the 5.5% sell “guideline” is reasonable and one that I am following.

Present Day

I don’t currently have $50,000 of capital invested into my DGT portfolio, but perhaps I will get there over time (someday). Right now, I only have 3 active positions that I am working on trading.

My current rotation of stocks:


The following stocks I hold are: Union Pacific (UNP), Norfolk Southern (NSC), and Walmart (WMT). As a part of the strategy, I tried to buy on the dips, spurred by negative news, or missed earnings reports. For DGT to work, you must indeed “buy low and sell high (or at least higher)”. Highlighted in green are my desired exit prices (they vary slightly since the allotments are not perfectly even at $5,000).

Risk Management

DGT is no more risky than DGI. In many respects, it’s like trading options and selling covered calls or cash secured puts on an underlying holding of interest. In the end, you are only initiating transactions on stocks that you wouldn’t mind holding for a long period of time.

I won’t say NEVER because I believe rules were made to be broken, but I nevertheless try to follow and adopt some basic guidelines. When it comes to DGT, my emphasis is to trade dividend growth stocks that I would have no problem holding for 10, 20, 30+ years. But I may make an exception every now and then to trade some hyper-growth stories on significant dips (just being honest)… Though of course I would never recommend this strategy (or DGT, for that matter) to anyone else!

What’s the worst-case scenario for a dividend growth trader? The stock keeps plummeting in price and you aren’t able to exit at a favorable price. While you wait for the tide to turn, you simply default back into Dividend Growth Investing (a hat I’m more than familiar with wearing) and basically just collect dividends like clockwork again… Which is the plan all along for a typical dividend growth investor!

Dividend Growth Trading is a naturally defensive form of trading. But if a stock like Chevron (CVX) wants to swing violently, up and down a trading range of $99 to $110 (in the short-term), who am I to try and fight it? As a trader, that works out great for me and I’ll just keep buying in at $99 and selling at $110 (ideally). Over and over again…

Actually, as a stock trader, I will have to operate under a slightly different lens — For instance, I would prefer to trade slightly more volatile stocks (like CVX as opposed to low beta ones like GIS) as the fluctuations leave more room to buy low and sell high).

In any case, as it pertains to principal preservation, I believe that DGT is actually safer than DGI. With DGT, I am rotating in and out of stocks and never need to stay in the market at all times. If stocks keep on rising and I don’t see any favorable positions to buy into, I can simply wait and hang out on the sidelines. Previously, I would have needed to stay fully vested in all my stock positions to pick up $1,897.92/year in dividend income. With DGT, I only need to trade for however long it takes me to exceed that target. Since I’ve already surpassed my income target for 2015, moving forward, I can be much more selective with how much principal I tie up in the market…

But if I wanted to earn more income and take on more risks, I could elect to keep playing this game and invest, say $50,000, like the hypothetical portfolio outlined above. In any case, that’s still only $50,000 of capital at risk, as opposed to much more before…

Capital Gains

Although DGT may help you squeeze out returns and earn some extra income (without being fully vested in the markets), it is not without its own set of limitations. As usual, there are no free lunches, and one very real consequence of DGT is this: missing out on growth stories and capital gains.

In general, if you elect to trade dividend growth stalwarts (PG, JNJ, KO, PEP, O, etc.) you most likely won’t miss out on any massive capital gains because the growth days for those companies are just about over. In other words, you should be able to trade in and out of these positions rather regularly before witnessing any drastic price appreciation from the market. However, if you are investing into prospective future Dividend Aristocrats (SBUX, V, GILD, etc.), chances are reasonable that you could sell out prematurely and miss the boat on rapid future gains… In regards to future capital gains, DGI has DGT beat, no doubt.

Most recently, I liquidated my position and sold off 100 shares of GILD to capture some short-term profits. By doing so, if the stock continues accelerating upwards and never decides to descend back down again (below my sell price), I will have missed out on a golden opportunity.

But you win some and you lose some. Missing out on some future growth stories is a possible reality that I’ve accepted as a consequence of utilizing the DGT approach. Your own situation may be entirely different, but in my own case, I’m primarily interested in locking in short-term profits as opposed to holding on for future share price appreciation, or dividend growth potential.


There are many ways to invest and we must do what is best for our own unique situation. As investors, it is extremely important to stay adaptable as markets will always fluctuate; what used to work before won’t necessarily work again in the future. Further, it’s necessary to take what other people are doing and saying with a grain of salt because what works for them won’t always work for you.

When I started investing in 2012, Dividend Growth Investing was the best strategy for me at the time. Over the years, I’ve worked hard and built up a portfolio of rental properties. Unfortunately, with those investments came with it a very large debt burden. As such, I’ve had to figure out a way to navigate through those circumstances…

Because the markets are as HOT as ever before, I’ve been reluctant to dive headfirst back into dividend growth investing with my newly freed up capital. Once I built back up an individual stock portfolio in excess of $100,000, I realized that my true preference was to protect the underlying principal, as opposed to staying aggressive and trying to eke out some more returns. As such, I was completely OK with sacrificing capital gains in the process.

So, I adapted. I took what I liked from DGI and modified it to fit my own needs. These days, I’m making use of Dividend Growth Trading to earn active income on my otherwise idle cash. By doing so, in a span of 5 months (without even being fully conscious of this strategy), I’ve been able to trade enough dividend stocks to earn $2,542.24 in short-term capital gains, which is in excess of the $1,897.92 I would have expected to earn as a fully invested DGI. Further, because I am only holding a few select positions at any given time, I have found a way to limit the amount of principal that I have in the market.

There’s no right or wrong way to invest. Do what works for you. For myself, I’ve settled in on DGT, and so far, so good…


Happy Trading! 

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No Nonsense Landlord
5 years ago

You are better off with a strategy of buying an index, a Boglehead or Buffet approach. 95% of money managers cannot beat the market 5+ years in a row. You will likely not either. You will also sleep better at night knowing you are going to match the market. Low fees too.

I buy ~$10K a month, a combination of IVV and DVY. Both ETFs. No commissions, no tax as long as I do not sell. I can sell just a small amount if I have to.

Good luck trying to create a style that works for you.

No Nonsense Landlord
5 years ago
Reply to  FI Fighter

I read the article. You are in investing $50K and assuming you get a 3% per month. My guess is that these stocks are highly correlated to the S&P. If the S&P will probably not fly as high up, or down as any one of these stocks. When you get in, and out, you have to beat taxes and commissions to equal the S&P. And have to spend a lot more time watching them. You are better off buying the S&P, and selling covered calls out of the money to capture a 10% yield. A 36% yield is unrealistic. Even… Read more »

No Nonsense Landlord
5 years ago
Reply to  FI Fighter

If you focus on only one or two stocks, and chart moving averages looking for buy at the touch of the 10-day (or 5 or 2…) average and an automated sell at a 2x the average daily range (ADR) above your buy, it may be better strategy. There is less to watch, but you have to watch it closer. I know a lot of traders that are able to buy a 5,000 share position, hold it for 2-3 minutes, and sell for a $200+ gain (maybe 04 to .10). Then do it again 4-5 times a day. I did that… Read more »

5 years ago

I’m with Eric here. If you’re a true buy and hold investor, you would be buying the index and not trying to time the market. You say cash is king, but all I hear you saying is that you’re smarter than the market and can time it successfully. The problem with market timing is when do you get back in? You don’t know without a crystal ball. The likelihood of picking a stock that does well is so much higher in a bear market like we’ve seen the last several years. They say that women are better investors because they… Read more »

Income Surfer
5 years ago

There’s another way you could explain this concept. It sounds to me like you’re trying to minimize your stock exposure while also harvesting gains. I would say you’re trading in securities that you wouldn’t mind holding…..provided the trade goes against you and you decide not to sell. Capital is still at risk, but perhaps less…..or at least for a shorter duration.

A portion of my portfolio is similar in that trade around a core position. Given the low volatility lately, I’ve been making VERY few trades.

Dividend Hustler
5 years ago

Thanks for sharing the article FIF. I think it’s a great strategy. Keep it up as I know you have put a lot of thought and planning for this strategy. I Like it. It’s working and you’re trading around solid blue chip stocks so no harm. Simple. I like Simple.
Have a nice and safe weekend my friend and always a pleasure reading your articles. Cheers bud.

5 years ago

I suggest instead a fixed percentage of stock market index funds and treasuries (or even CDs or cash) that meets your risk profile (standard deviations, max draw downs, etc,). The only thing regular DGI has going for it over straight up indexing is psychological (feeling like you are earning income). Here you don’t even really have that. You make it sound like this provides you greater liquidity + similar or greater profits to remaining fully invested. Given how easy it is to sell a stock (and your acceptance of the tax consequences in your strategy above), you do not have… Read more »


[…] In my last post, I talked about not really wanting to stay actively involved with the markets because I didn’t want to risk underlying principal. I thought that I had found a reasonable strategy that would allow for me to earn some “interest” on my cash out refi funds ($200,000), while at the same time reducing my overall exposure to these scorching hot markets. […]

5 years ago

wow.. definitely a mix here of comments of those who have smart advice comments (Eric & Leigh) and others who think they can outsmart / out trade the markets even with the handicap of taxes transaction costs. Good luck vs the endowments and hedge funds.. bet they don’t trade these securities in milliseconds with their super computers. Yep – good strategy (sarcasm).

5 years ago

Can you explain to me why you have holdings in BABA,CELG,AMGN,GILD,TD? I am a dividend growth investor and I won’t touch most of those companies. I also have the same philosophy as you do with you RE holdings.

Also, requiring ones email here is a bit odd… Is it public?

5 years ago
Reply to  FI Fighter

I’m sure you did well with the biotechs recently but to me those stocks are better for trading than long term buy and holds. As a rule I avoid tech (in which I include your biotech companies) due to the competitiveness of the field and financial stocks such as TD because of the risk of manipulation. I am also not a fan of retailers. I am a big fan of investing in liquor/alcohol stocks in lieu of biotech if I want nice growth and dividends. You may want to look at this list of companies which I agree with for… Read more »


[…] Quite recently, I’ve made a lot of sudden moves… One minute, I was investing in dividend growth stocks and amassing a portfolio in excess of $100,000. The next hour, I’m changing my mind, and deciding to liquidate a huge portion (85%) of my holdings, and switching over to Dividend Growth Trading… […]