Dividend Investing
Dividend Investing is an investment strategy that investors use to generate regular income from their investments. It is a strategy that revolves around building an investment portfolio composed primarily of stocks or a basket of stocks that pay regular dividends, providing a regular stream of income to the investor. It is a commonly used strategy for income investors who are looking to build a secondary source of passive income, savings for their retirement or other purposes. Dividend investing is commonly viewed as a long-term approach, where investors aim to hold their dividend-paying stocks for extended periods, benefiting from both the consistent income stream and the potential for capital appreciation. Diversification also plays a significant role in this strategy to mitigate risk, as dividend investors often spread their investments across various industries and sectors.
WHAT IS A DIVIDEND?
A dividend is a discretionary distribution of profits which a company's board of directors gives its current shareholders.
It is typically a cash payout to investors made at least once a year, but sometimes quarterly.
Dividend stocks provide two sources of return: regular income from dividend payments and capital appreciation of the stock price.
Because of their lower volatility, dividend stocks often appeal to investors looking for lower-risk investments, especially those in or nearing retirement.
PROS
Dividend Investing offers the dual advantage of income and potential for growth.
Dividends also provide opportunities for reinvestment, allowing investors to use their dividend income to buy more shares in the company.
Dividends provide an immediate return on investment that can be reinvested to generate compound growth.
RISKS
The company may experience low growth or stop paying dividends altogether.
Dividend investing is also impacted by market volatility.
IDENTIFYING DIVIDEND STOCKS
This is the annualized dividend represented as a percentage of the stock price. Yield is useful as a valuation metric when you compare a stock's current yield to its historical levels.
This is the dividend as a percentage of a company's earnings. In general terms, the lower the payout ratio, the more sustainable a dividend.
This is the dividend as a percentage of a company's operating cash flows minus capital expenditures, or free cash flow. This variability can render a company's payout ratio misleading at times.
Earnings per shares (EPS).
The EPS metric normalizes a company's earnings to the per-share value. A history of earnings growth is often evidence of durable competitive advantages.
P/E ratio.
The price-to-earnings ratio is calculated by dividing a company's share price by its earnings per share. The P/E ratio is a metric that can be used along with dividend yield to determine if a dividend stock is fairly valued.
Total return.
This is the increase in stock price (known as capital gains) plus dividends paid.