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yield hog

I don't just play a dividend investor in the newspaper. I do this stuff in real life, too, and I'm pleased to report that the results have been quite gratifying.

But it was not always so. When I started investing two decades ago, I didn't have a clue what I was doing.

I took too much risk. I traded too frequently. I had no coherent strategy.

It took many years of reading investing books, learning from my mistakes and talking to people wiser than myself (a luxury of this job) until I finally "got it."

What, exactly, did I "get"?

That becoming a successful dividend investor is about more than picking the right stocks; it's about rejecting the market-as-casino mentality and embracing a new philosophy that stresses rising income and long-term returns instead of short-term price movements.

Such a patient approach is not something that comes naturally to most people, because it's not how we've been conditioned to think about the stock market.

Viewed through the lens of the media and popular culture, investing is all about speed and excitement, whether it's stories about IPO billionaires or commercials that encourage people to trade stocks on their smartphones.

The investment industry caters to the desire for instant wealth with endless analytical information that's supposed to help you identify the next 10-bagger.

One of the most important things I've learned is that, to make dividend investing work, you need to tune out all the noise and fundamentally change the way you think about the stock market.

Here are a few lessons that have stuck with me.

Think as an owner, not a trader

If you owned a small business, would you constantly want to know the price your company would fetch in a sale? Probably not. You would be more concerned with making sure the business is profitable, its market share is growing, and you and your employees are drawing a reasonable salary.

Similarly, if you owned a rental property, would you need to know its market value every day? Again, probably not. Yet many stock market investors – who, after all, are part owners of the companies they hold – obsess about the price of their shares.

The relentless focus on prices, combined with the ease of buying and selling stocks online, often leads people to trade when buying and holding a good business would be a better strategy.

Focus on income, not share price

Stock prices are volatile and unpredictable. In the past year, my best-performing stocks have gained more than 30 per cent and my worst performers have dropped more than 10 per cent. Yet, because virtually all of my stocks raise their payouts at least once a year and because I reinvest all of my dividends, my portfolio income never falls. It only goes up. This provides a huge psychological boost and is a powerful incentive to stay the course.

Invest in quality

When I buy a company, I aim to hold it for years, if not decades. So, I steer clear of speculative stocks or turnaround situations and stick with profitable, growing businesses with an entrenched market position – banks, pipelines, utilities, real estate investment trusts, telecoms and large consumer product companies. If sales, earnings and dividends are growing, I go along for the ride.

If investing in individual companies makes you nervous, there are a growing number of Canadian and U.S. exchange-traded funds that focus on the dividend space. ETFs offer a hard-to-beat combination of low fees and diversification, and they reduce the anxiety that comes with trying to select stocks.

Think long term

My goal is to build a portfolio of companies that will provide a reliable and growing source of cash flow to supplement my income in retirement. Because I'm investing for income, not capital gains, I don't get panicked by short-term price moves. If profits and dividends are growing, the share price will eventually rise as well.

Occasionally, a company's outlook will change for the worse, in which case it might be a sale candidate. But because I'm careful about what sorts of companies I buy, this happens rarely.

Kick back and relax

One of the best things about the dividend approach is that it minimizes the stress of investing. It is a strategy well-suited to people who are content to get rich slowly and who prefer the predictability of dividends to the manic excitement of the markets. It's not the only strategy that works, but it has worked well for me.

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