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We all start out working for money, right? But eventually we want our money to work for us.

In this article, Ben Reynolds shares how to get paid over and over again from work you do once with dividend growth investing.

Sounds good to me!

Ben runs a site called SureDividend.com, and advocates dividend growth investing to make sure your hard-earned side hustle income continues to pay you for years down the road.

Sure Dividend uses The 8 Rules of Dividend Investing to build high quality dividend growth portfolios for individual investors.

Here’s Ben:

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Regular Side Hustle Nation readers and listeners have a whole brain full of strategies on how to get paid.

A few examples include:

Over time you will build up multiple income streams.

The question is:

What do you do with the extra income?

What if your savings could pay you growing passive income every year? This article covers how to make your side hustle earnings continue to hustle for you – without doing anything.

The Basics of Dividend Growth Investing

I believe your investments should pay you. If not, what’s the point?

Dividend growth investing is an investment method that seeks to invest in businesses that pay you more in dividends every year. Before we go too deep into dividend growth investing, it’s important to understand the basics of the stock market.

Many people think of the stock market as a casino. Sometimes one ticker symbol will go up, other times it will go down. You hope to get lucky.

This is the exact wrong approach.

The stock market is a place where you can easily buy fractional ownership in businesses. You get to pick which businesses you invest in.

You can invest in mediocre businesses, or great businesses. The cool thing is, occasionally great businesses will be trading at around the same price as mediocre businesses.

And by price I don’t mean the share price. When you invest in businesses, you are really investing in what they produce – namely earnings. Instead of share price, think of the price in terms of what you have to pay to ‘buy’ a dollar of earnings.

This is called the price-to-earnings ratio.

It is calculated as a stock’s price divided by its earnings-per-share. As an example, a stock with a share price of $100 and $5 in earnings-per-share will have a price-to-earnings ratio of 20.

The S&P 500 currently has a price-to-earnings ratio of around 24, to give you an idea of what is “normal” right now.

Nick’s Notes: Based on my rudimentary understanding of investing, P/E ratios are only one measure of value and they vary widely stock to stock.

For example, today Ford has a P/E ratio of 6. Does that mean it’s undervalued?

Facebook has a P/E ratio of 72. Does that mean it’s overvalued?

Here’s a Warren Buffett quote that discusses the relationship between price, value, and quality:

“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

Note: Benjamin Graham is the father of value investing and Warren Buffett’s mentor.

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You will likely do well if you follow the Warren Buffett approach of buying quality businesses trading at fair or better prices.

After all, it worked well for him; Buffett’s net worth is currently over $70 billion.

Nick’s Notes: Do you know your net worth? Set up a free account at Personal Capital to find out.

But there’s another important aspect to making your side hustle money pay you every year:

Dividends!

The Importance of Dividends

So far we’ve talked about earnings (also called company profits). All things being equal, it’s better to buy into an earnings stream for cheap, meaning pay a lower price-to-earnings ratio for the businesses you invest in.

Nick’s Notes: All things are never equal. :)

But what a company does with its earnings matters.

Businesses can either reinvest earnings back into operations to (hopefully) fuel future growth, or they can pay the earnings to shareholders in the form of dividends.

Nick’s Notes: The best companies in the world (from an investor’s standpoint) do both.

The beauty of dividends are that you get paid (typically quarterly) from your investments.

Say you invest in Coca-Cola (KO). Every time someone buys a Coke, Coca-Cola makes money. The company pays out around 78% of its earnings to shareholders in the form of dividends.

Said another way, 78% of the profit Coke makes goes to shareholders. If you own Coca-Cola stock, you are profiting from every sale of a Coca-Cola product.

Somewhere, a Coke shareholder just got paid.

Coca-Cola currently has a dividend yield of 3.2%. That means for every $100 you invest in Coca-Cola from your side hustle money, you will earn an extra $3.20 a year in dividends.

Dividend paying stocks have an advantage over non-dividend paying stocks. You know the company is really making money – otherwise it wouldn’t be able to pay dividends.

It’s not just me that thinks dividend paying stocks make great investments. Dividend stocks (and especially dividend growth stocks) have historically outperformed the market.

Dividend Growth: The Real Power of Compounding

Going back to Coca-Cola, it has a 3.2% dividend yield right now. But the company has grown its dividend payments for 54 consecutive years. It is extremely likely that Coca-Cola will pay more dividends next year than it does this year.

Coca-Cola has increased its dividend payments by an average of 8.4% a year over the last decade. The company has more than doubled its dividend in 10 years. This is the power of dividend growth investing.

Let’s say you invested in Coca-Cola today, and it manages to double its dividend again in 10 years. Your original investment will be paying you 6.4% a year – instead of 3.2% (this is called your yield on cost).

Nick’s Notes: And you collected the dividends each and every quarter between now and then as well. Simple and easy way to get paid over and over again.

In good times, in bad times, it doesn’t matter if the stock goes up or down, you keep getting paid. In fact, after you buy, the share price is irrelevant. It’s all about that quarterly cash flow.

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Cha-ching!

When you invest in great businesses with histories of paying rising dividends every year, you can expect your dividend income to continue increasing without you doing a thing.

Coca-Cola is not the only businesses with a long dividend history.

Coca-Cola is a member of the Dividend Aristocrats Index. The Dividend Aristocrats Index has outperformed the market by over 3 percentage points a year over the last decade. It is comprised of 50 businesses that have paid increasing dividends for 25+ consecutive years.

Nick’s Notes: Many of these companies are household names, like AT&T, Johnson & Johnson, Procter and Gamble, McDonald’s, and Walmart.

You can see all 50 Dividend Aristocrats here.

Putting It Together

So how do you build a portfolio of high quality dividend growth businesses purchased at fair or better prices?

One way is to invest in Dividend Aristocrats with a combination of higher dividend yields and lower price-to-earnings ratios. If you do this, you will be investing in great businesses that are likely trading at fair or better prices.

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Not that kind of yield!

Nick’s Notes: Based on Ben’s recommendation of higher dividend yields and lower P/E ratios, here are some potential Aristocrats to target:

AT&T – Dividend yield 4.9%, P/E 17.30

AbbVie – Dividend yield 3.6%, P/E 18.79

Emerson Electric – Dividend yield 3.5%, P/E 18.58

Consolidated Edison – Dividend yield 3.6%, P/E 18.22

Archer Daniels Midland – Dividend yield 3.1%, P/E 14.68

Walmart – Dividend yield 3%, P/E 14.85

If you prefer ETF investing over purchasing individual stocks, the Dividend Aristocrats ETF (NOBL) is a good choice as well – though it does have an annual expense ratio that will dampen returns versus investing only in individual stocks.

Nick’s Notes: Bryn and I own NOBL, reasoning that a .35 expense ratio is a small price to pay for not doing any additional research or trades. If these companies collectively outperform the market by 3 percentage points, it’s still a win over a general index ETF.

I also have a Betterment account with automatic monthly deposits. I was attracted to the low cost, automatic rebalancing, tax loss harvesting, done-for-you set up. Loving it so far. You might also consider an eREIT — a real estate investment trust. For example, Fundrise invests in a diverse portfolio of income-producing properties and has historically paid a 5-7% dividend.

By investing your side hustle money into great dividend paying businesses, your hustle money will hustle harder for you.

Here’s where you can really compound your hustle money – by reinvesting dividends into more great dividend growth stocks.

Then your hustle money will hustle for you by paying you dividends, and those dividends will hustle for you by being reinvested into more dividend paying stocks which will pay you more dividends in a virtuous cycle of wealth compounding.

Where Do You Actually Buy Dividend Stocks?

I keep my brokerage account with Fidelity, just because that’s where I’ve been for years.

If I was starting over today, I’d probably set up shop at M1 Finance, a modern brokerage where you can buy stocks for free (no trading fee).

Join up, connect your bank account, transfer some funds, and you’re good to go on your dividend investing journey!

The other cool thing about M1 is you can buy fractional shares of stocks–great if you don’t have enough (or don’t want) to buy a single high-priced share.

Note: I’m an affiliate for M1; if you sign up, I’ll receive compensation.

Your Turn

Nick here again. What do you think? Do you get excited about the passive cash flow promised by dividend stocks?

Or do you think you can multiply your dollars faster by investing in yourself or reinvesting back in your business?

I chatted with a professional stock trader who used the markets to quit her job, initially with the goal of earning $300 a day.

Your side hustle may parallel the overall trends. Most startups and young companies don’t pay dividends, opting instead to reinvest their profits in driving more growth. As the companies mature, they grow slower and reward investors with dividends.

Paying yourself AND investing for the future of the business can maximize your motivation and build a passive income stream that can pay you for years to come. I really like the idea of setting some money aside to “hustle” on your behalf through vehicles like this.

If you want to learn more about dividend investing, be sure to check out Ben’s site at SureDividend.com.

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Stock photos from Monster Ztudio via Shutterstock.