Personally, I’m not sure how to go about investing for the short term. Whether the stock market goes up or down tomorrow, next week, next month, or next year is anyone’s guess. So, I’m here to invest for the long term.
The time horizon is just one of the factors investors need to think about. Why are you investing? If you’re investing for a more financially secured future, that’s too general.
Goals should be specific, achievable, and measurable. Since stock prices are so unpredictable, I’d rather set my goals based on income and income growth.
Specifically, I’m looking for stocks that have a history of paying strong dividends. If I buy stocks that pay yields in the 3-5% range and grow their dividends by 5% or higher, but don’t grow their dividends every year, I require a higher yield from them. Specifically, they must be higher than 5%.
Northern Property REIT (TSX:NPR.UN) collects rental income from residential properties it owns. For 12 years, the real estate investment trust has maintained its distributions and even increased it eight times. Northern Property pays an above-average yield of 8.8% at about $18.50 per unit.
High-yielding stocks are typically riskier than low-yielding stocks. So, you should look at each high yield stock individually before deciding if it’s a good fit for your portfolio.
Income growth goal
Other times, I’m looking for stocks that have a history of growing dividends. These stocks typically yield 3-5% and grow their dividends by 5% or higher.
For example, Fortis Inc. (TSX:FTS) yields 3.8% about $39 per share. The utility has increased dividends for over 40 years in a row. It last increased its dividend by 10.3% this quarter. If it continues to perform well, it could very well continue to grow its dividend at a rate above 5% per year.
Portfolio goal of income and income growth
Now, investors don’t just hold one or two stocks, but if we assume that a portfolio was started at these prices and held an equal amount in Northern Property REIT and Fortis, then the average yield of this portfolio would be 6.3%. A conservative forecast of the income growth is 2.5%, assuming Northern Property’s distribution doesn’t grow. So, one year later, we would expect to get a return in distributions of 6.3% and growth of 2.5%.
The above is an example of setting goals for income and income growth for each investment and for the portfolio as a whole. The goals are realistic expectations.
If the initial yield is not enough, or if the income growth rate is too low for your goals, then you need to switch to another stock. Or you could save some more money for investing in the future.
For your first year of investments, you might be looking for an income of $100. Based on a 4% yield portfolio, you’ll need to invest $2,500. Based on a 6% yield portfolio, you’ll need to invest $1,667. And then in the second year, you might be looking for an income of $300. Setting interim goals to work towards a long-term goal can help you stay on track.
Fool contributor Kay Ng owns shares of NORTHERN PROPERTY REIT.