Over the years, there are several investing trends that have come and gone. Investors are constantly looking for the next investment guru to tell them about his magic investing formula. From index investing to short selling based on technical analysis, there hundreds of investing theories. You can now play with commodities, forex, calls and puts. Most investing techniques become the “flavor of the month” before rapidly fading away. However, there is one strategy that has been posting solid results for several years: this is called Dividend Investing.
Year after year, quiet and “boring” companies are distributing a part of their profits to their shareholders. This 2 or 3% dividend distribution doesn’t look incredibly awesome to an investor looking for a double digit return. In fact, there are a lot more to dividend investing and simply receiving a quarterly check. This is why I’ve written the 30 things you must know about dividend investing.
#1: Dividend Investing Returns is Huge
Over the past 40 years, 58% of the stock market yield was produced by dividends. Dividend stocks maintain a more stable value over time (meaning less stress for investors) while producing a constant cash flow that is more than sufficient to cover the rate of inflation.
#2 Dividend Investing is Easy to Understand
A prestigious financial background is not required to pick solid dividend stocks. There are easy to understand and accessible key ratios to use in order to build your dividend investing model. You don’t need to read thousands of investing books to understand the main concept of dividend growth.
#3 Dividend Investing Has Low Trading Fees
Since the main goal of dividend investing is to invest over a long term period, it reduces the number of trades you will make in a month. The portfolio turnover rate should be pretty low. This is a good way to save on trading fees. In addition to that, DRIPs (Dividend Reinvestment Plan) allow you to reinvest your dividend payouts into the company stocks without generating trading fees.
#4 Dividend Investing Is Tax Efficient
If you are based in USA or Canada, you should know that dividend income is less taxed than interest income. It’s always better to receive dividend income compared to interest. The more money left in your pocket after taxes, the higher your real investment return is.
#5 Dividend Investing Protects Your Investments From Inflation
If you pick solid dividend stocks with constant dividend growth, your investments will be protected from inflation by the dividend payout. If the dividend growth is superior to the inflation rate (roughly 2%), your assets will grow faster than your cost of living.
#6 Dividend Investing Doesn’t Require Being Glued To Your Trading Screens
Since dividend investing is a passive investment strategy, it doesn’t require you spend hours a day on your computer watching the markets. Once a stock is bought, you should be able to review your position only quarterly since fundamentals shouldn’t change quicker than that.
#7 Dividend Investing Doesn’t Require High Technology Programs To Trade
You don’t need to follow technical analysis metrics or be a day trader to be successful at dividend investing. In fact, a simple online brokerage account is sufficient to manage your portfolio.
#8 Dividend Investing is a Great Way To Create Passive Income
Once you have purchased your shares, you will receive automatically dividend payments. It’s a great way to create a passive income where you don’t need to actually work to earn money. Since portfolio management doesn’t require much time with this investment strategy, you can definitely call it passive income.
#9 You Can Generate Steady Monthly Income
If you use a dividend calendar, you can create a portfolio generating monthly dividend payouts. As most dividend stocks are paying dividends on quarterly basis, it’s only a matter of managing your calendar in order to receive monthly payouts.
#10 Dividend Investing is the Only Strategy that Pays You To Wait
During bear markets, you will be among the only investors receiving money in the meantime. As long as you don’t sell your stocks, you will continue to receive the same payouts (assuming there are no dividend cuts). It helps reduce your paper loss while creating liquidity for further trades while the market is cheap.
#11 You Can Grow Your Position Without Trading
If you like a company and would like to buy more shares, you usually need to make a buy transaction which will trigger a trading fee. Dividend investing allows you to DRIP your stocks and automatically buy new shares each time a company pays dividends.
#12 An 8% Dividend Yield Portfolio is Attainable
Due to the power of dividend growth, you can double and triple your dividend yield base on cost of purchase (COP). Therefore, if you hold your stocks long enough, you can earn up to a double digit dividend yield on yourCOP.
#13 There Are Lists of Great Dividend Stocks Available for You
There are a few lists of popular and strong companies that have increased their dividend payout each year for the past 5, 10 and even 25 years. These lists are free and easily accessible for you. Among the most popular, you can find the following:
Dividend Aristocrats List
Dividend Achievers List
Dividend Champions List
#14 Bonds Pay Less Than Dividend Stocks
While dividend stocks are riskier, today’s market for bonds is pretty discouraging. If you are able to pick solid companies, you can earn a 3 to 4% dividend yield as compared to a 1-2% on Government bonds. Since bond values will drop on an increase in interest rates, dividend investing seems even more appealing in the current context.
#15 Dividend Investing is Great for Retirees
Most retirees seek for a source of income to be derived from their portfolio. While interest income is too small these days, dividend investing can provide more healthy payouts for retirees. If you can live on your dividend income, paper losses in a bear market won’t affect you too much.
#16 Dividend Investors Should Not Fear a Dividend Bubble
The fact that dividends are paid by companies in various industries shelters dividend investors from a potential dividend bubble. Techno stocks are not evaluated as consumer, cycle or utilities stocks. Building a well-diversified portfolio with several sectors will allow you to generate a 3%+ dividend yield from your portfolio without fearing a potential bubble in a sector. The key is always to pick undervalued or fair value stocks.
#17 High Dividend Yield Should Not Be Your #1 Criteria for Stock Picking
Seeking high dividend paying stocks is definitely not the right strategy. When a dividend yield is too high, this is usually because the company is having difficulties. A high dividend growth combined with a low dividend payout ratio is preferable.
#18 Dividend Investing is Sustainable
There are stocks that have paid dividends for the past 50 years and more! Can you imagine how easy investing could be if you can hold a stock that pays you for life? This is the case for some dividend stocks!
#19 Have Realistic Expectations
Another interesting point about dividend investing is that it forces you to have realistic expectations. Since you buy stocks generating 2, 3 or 4% in dividend, you don’t expect a growth of 50% each year. Lowering your expectations also means becoming less greedy. This is a good behavior for any investors!
#20 You Get 2 Sources of Growth
Dividend investing allows you to benefit from 2 sources of growth: dividend growth generated by the company’s ability to increase its dividend over time and capital growth generated by the company’s ability to grow its sales and profitability at the same time.
#21 Easy Sell Signals
There are a few easy sell signals on dividends stocks. When there is a dividend cut, a high dividend payout ratio or no dividend growth for a few years, it’s time to sell your stock and look for another investment.
#22 You Can Hold Your Stocks Forever
Some dividend investors aim to hold the same stocks for over 20 years. The true power of dividend growth can be operated during such long period of time and this is how you can achieve building a dividend portfolio paying incredibly high dividend yield on your cost of purchase.
#23 The Power of Compounding Interest
Each time a company increases its dividend, you benefit from the power of interest compounding. Therefore, a 5% dividend increase every year becomes a lot more. For example, if a company pays a $1 dividend per year and increase its dividend by 6% each year, the company will be paying a $2 dividend in only 12 years.
#24 There Are Several Ways to Invest In Dividends
You can actually buy dividend mutual funds, dividend ETFs or pick your own dividend stocks. I personally prefer stock picking to indexes and mutual funds. However, if you don’t want to spend much time on your investments or you are not interested in learning investment metrics, dividend ETFs and mutual funds are great solutions.
#25 You Can Start Investing With As Low as $1,000
You don’t need to be a millionaire to invest in dividend stocks. You can actually read how to setup a $1,000 dividend portfolio. Your account will increase slowly but will surely grow with dividend payouts and additional savings.
#26 Dividend Stocks Perform Well In Volatile Markets
While the stock market has been quite rocky since 2008, there is only thing that stays steady; the dividend payout! During a year, stocks can go up and down but if you have selected the right companies, you will continue earning the same dividend payouts. This is one of the only securities you can have during a volatile market.
#27 Dividend Investing is Less Risky Than The Overall Stock Market
If you are a disciplined investor investing in solid dividend stocks (don’t go for the high yield!), dividend investing is reputed to be less volatile / less risky than the overall stock market. A company that pays dividends must be in control of its balance sheet before distributing its money. Therefore, it *should* be more stable than a techno startup!
You Want More??
If this list of 27 things you must know about dividend investing isn’t enough, it’s because you really want to learn how to invest in dividend stocks!
I can suggest you an awesome read on the topic:
Dividend Investing – How To Build a Never Ending Cash Distributor (FREE!!)