When it comes to money and investing, there are lots of different strategies that you can take. Some people love spending hours trying to pick winning stocks, others invest passively in index funds and some people stick to retirement accounts. Just like there is no best car, there is no best strategy for investing - it all comes down to the investor’s preferences, goals and risk tolerance.
When it comes to investing strategies in the stock market, however, we believe there is one that is too often overlooked.
This article will look at why dividend investing can be a powerful part of your long-term investment strategy.
Dividend investing is defined as investing in stocks almost entirely for the dividend that they pay. A dividend is a distribution of earnings that a company will pay out to shareholders, usually on a quarterly basis. For example, Disney pays a dividend of around $0.88 per-share bi-annually. This means that if you bought 10 shares of Disney stock, you can expect to receive $8.80 in dividends twice a year (or $17.60 for the year).
Companies are constantly changing the rate at which they pay dividends and a particularly strong or weak quarter may result in a higher or lower dividend. However, most companies take great pride in their dividend and make a point to consistently increase it over time. This is good news for dividend investors.
There are a few reasons why investors choose to invest in dividend producing stocks:
1. Reliability - No matter how much analysis you do, there will always be a degree of uncertainty about whether a stock’s price will increase or decrease. Dividend payments, on the other hand, are much more predictable and reliable. By focusing on just dividends, an investor can get a better sense of the return that they will get on their money.
2. Income - Dividends are a great way to make consistent income from stocks. If done correctly, this can result in substantial passive income each month.
Speaking of doing it correctly, let’s take a look at a few of the most common strategies for investing in dividend producing stocks.
When it comes to dividend investing, there is no right or wrong method. Since lots of companies have been paying their dividend for years, you will have a good sense of what you can expect from a company before investing.
The main premise of dividend investing is to build up a portfolio of dividend-paying stocks so that you can make consistent passive income from these payments. However, when it comes to which stocks you should choose you have some freedom (we will take a look at some specific stocks in the next section).
First, here are a few other things you should look for in a company before deciding to invest:
1. Maturity - More established companies like Disney or Procter & Gamble have been around for a while and are established in the industry. These companies are more likely to pay reliable dividends. On the other hand, younger companies are more likely to focus on growth and reinvest profits back into the company.
2. Profitability - The more profitable a company is, the more likely they are to increase their dividend.
3. Consistency - Dividend payments are a matter of public record. This means you can look at a company’s payment history to make sure that they have consistently paid dividends.
4. Staggered payments - As previously mentioned, companies release dividends on different schedules. As a dividend investor it would be smart to invest in companies who release dividend payouts on different timetables. This way you know that each month you will have income coming in (instead of waiting for the end of the quarter).
There are a few companies that are very well-known for their dividend payments. These are usually companies who have already achieved massive growth, and now are more interested in sharing their profits with shareholders.
Here are a few examples of dividend stocks:
NOTE: A common metric used to analyze dividend stocks is the dividend yield. The higher the dividend yield, the bigger the dividend is relative to the stock price. However, a higher dividend yield is not always good because it could signal a falling stock price.
➢ Siemens AG - One of the world’s largest and most diversified technology companies. Their dividend yield is 2.83% (at the time this was written).
➢ Boston Properties - Owns 196 commercial real estate properties across the US. Their dividend yield is 4.34%.
➢ Walmart - The world’s largest and most successful retailers. Its e-commerce business is also growing rapidly, meaning its business is not at risk like many other retailers. Walmart’s dividend yield is 1.45%
➢ Procter & Gamble - A consumer packaged-goods company that owns hundreds of well-known household brands. Their dividend yield is 2.23%
➢ Exxon Mobil Corporation - This oil giant which has been a favorite for dividend investors for a long time. Their dividend yield is 9.5%.
➢ The Coca-Cola Company - Coke is one of the world’s strongest brands and sells popular beverages around the world. Their dividend yield is currently 3.03%.
If choosing individual stocks for your portfolio feels like a lot of pressure there’s another strategy that you can explore. Instead of choosing individual stocks you can invest in what is called a dividend fund. A dividend fund is a mutual fund that owns multiple different dividend-paying stocks in one portfolio.
This means that you can buy one share of a dividend fund but receive many of the same benefits as buying individual stocks. These benefits include:
➢ Diversification - Since these funds own lots of different stocks, you will be protected against the price of one stock falling.
➢ Ease - Instead of keeping track of a portfolio of stocks, you only have to monitor one fund.
➢ Time - Fund managers have already done the hard work of choosing stocks for you.
No investment strategy is truly risk-free, and this option does come with its downsides. A major one is that you do not have the same flexibility as you would if you chose all of your own stocks.
We hope that you have found this article valuable when it comes to understanding why dividend investing should be part of your strategy. Please subscribe below to get alerted of new articles as we write them!