Here's the 1 Thing Every Dividend Investor Should Know About Building Passive Income That Lasts a Lifetime

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Here's the 1 Thing Every Dividend Investor Should Know About Building Passive Income That Lasts a Lifetime.

investing ideas :: 2hrs ago :: source - motley fool

By Neil Patel

Investing in high-growth stocks gets a lot of attention. That's because there's a chance you can achieve robust returns. But this isn't the only way to play the stock market. Some investors want to follow a more proven approach.

For these dividend investors, there's one important thing to know when it comes to building a passive income stream that can last a lifetime.

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Prioritize dividend growth

If you're looking to create a portfolio that can generate income for decades into the future, directing your attention to Dividend Kings is a smart move. This illustrious list consists of companies that have increased their dividend payouts in at least 50 straight years. This showcases management's ongoing focus on returning capital to shareholders. And it highlights the durability of these businesses, their competitive positions, and their financial performance.

One of the most widely recognized Dividend Kings is Coca-Cola. In February, the board of directors issued another payout hike, marking 64 consecutive years of increases.

Lowe's is another solid business that falls into this category, despite dealing with macroeconomic headwinds. Its dividend has risen in 55 straight years.

Another stock to consider that has a superb history of dividend growth is Procter & Gamble. Its streak puts Coca-Cola and Lowe's to shame. The consumer goods giant just raised its quarterly dividend payout in April. This was the 70th straight year of a hike.

Procter & Gamble has also paid a dividend in a mind-boggling 136 straight years. And of these three businesses, it has the highest dividend yield, which is currently 3%.

While all three of these companies have unbelievable track records in place when it comes to dividend increases, buying them today doesn't necessarily mean you'll produce market-beating returns. These are all mature businesses that aren't in a position to report strong growth in the future. Remember this before allocating money.

Berkshire Hathaway's extreme example

In its enormous public equities portfolio, Berkshire Hathaway's third largest holding is Coca-Cola. Warren Buffett built up this position from 1988 to 1994, spending $1.3 billion in total to acquire a stake in the beverage stock.

More than three decades later, this financial decision is paying off handsomely. Coca-Cola pays annual dividends of $2.12 per share. This means that the 400 million shares Berkshire Hathaway owns bring in $848 million in passive income every year. That figure represents well over half of the entire initial capital outlay.

Investors shouldn't expect this kind of result. However, this extreme example reveals the power of patience mixed with persistent dividend growth.

Should you buy stock in Coca-Cola right now?

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.

This article was originally published by The Motley Fool