Financial Literacy Investing

Dividend Investing for Beginners- 3 Strategies for Success and How to Avoid the Pitfalls

Dividend Investing

Imagine laying on the beach on a beautiful day drinking your favorite drink without a care in the world. The noise of a busy life and the annoyance of having to deal with work has long gone away. You’ve been preparing for this day your whole life and now you’ve found a new way to live. Who knew that you could retire from investing and live off dividends? The majority of people new to investing are unfamiliar with the possibility of generating income from investing. They were told they could be the lucky ones to invest in crypto and become the next crypto-millionaire. If they were early investors in this new obscure company, it would be the next Amazon. Most of us were painted this rosy picture of how great life would be once we started investing and that we could make tons of money fast. Unfortunately, this is far from the truth. However, the fact is there is a way to build wealth through investing and even create additional income for yourself at the same time. Let me explain.

Dividend Basics

WARNING – Be careful using the dividend yield on investing platforms; this yield can be out of date or just plain incorrect. Always do your research to find the correct dividend yield.

Choosing the right dividend Stock

Now that you understand the basics of dividend stocks, we can now talk about some ways to pick the right one that fits your needs. To get started, here are two resources that will assist you in finding the dividend history and dividend yield.  

I chose these resources because of their accuracy, timely information, and, best of all, they are FREE.

Value Line

For Value Line, I recommend you research using the stock screener. Here you will be able to customize your search criteria for what benefits you the most. This will give you a good start; but further due diligence is required to ensure you make the best decision. You will be asked to register after your first few searches but the stock screener will remain a free resource to use.

Dividend Investing
How to research

NADAQ.COM

This website will allow you to search individual stocks. Its ease of use and clear layout will allow you to see the dividend history along with other news and analysis that will be helpful to you.

There are 3 strategies I suggest when choosing dividend stocks.

Strategy 1 – Don’t chase the Yield

One of the biggest mistakes new investors make is focusing on the dividend or the dividend yield. Be cautious when you see a stock with an extremely high dividend yield. The higher the dividend yield, the more potential risk. It could mean one of two things, either the dividend was recently increased and the stock price hasn’t risen yet or, worst-case scenario, the stock price has recently dropped indicating the company isn’t performing well and the dividend will soon decrease or go away completely. Although our goal is to create a solid return on investment through dividends, we must also ensure the company is managing its finances well enough to continue providing its shareholders a dividend. Remember, the best-case scenario is to choose a healthy company that can continue to pay a long-term dividend with room to increase in the future as the stock appreciates.

Strategy 2 – Stability versus Capital Appreciation

As a dividend investor, another key metric to utilize is dividend payout ratio (DPR).

To go a little deeper, if you want to experience double the benefits, looking for companies with 60% or lower DPR will help point you in the right direction. To use a simpler way, instead of looking for the company’s net profits and total dividend payout, use the most recent dividend per share (DPS) divided by the earning per share (EPS) to find the DPR. This will amplify your return on investment (ROI) giving you’re the best of both worlds. On the flip side, companies that are stable will usually have a DPR of 61% or higher. One example is real estate investment trust (REIT). REITs are required to distribute a minimum of 90% of their income to shareholders which make most REITs stable companies with a lower likelihood to provide capital appreciation. Although the stock price of REITs may not rise extremely high, as long as the company is performing well, you can always count on a dividend which is what makes these companies great picks for dividend investors.

Strategy 3 – Dividend Reinvestment Plan (DRIP)

Utilizing a DRIP will allow you to create a snowball effect over time by increasing your dividend by buying more shares. Now that we understand that companies may decrease and increase its dividend, if we compound this strategy with a company that provides stock appreciation, the long-term return could be massive.

In Final…

Dividend investing, done the right way, can be an excellent way to create wealth and provide an additional return on investment for your stock portfolio. Adding dividend stocks to your portfolio can deliver diversity which will help in times of high volatility in the market providing steady returns when stock prices are falling. Finally, if you don’t have the time to keep track of the news related to your stocks if picking individual stocks is not for you, choosing a great dividend Exchange-traded fund (ETF) may work best for you. It will provide you with a collection of dividend paying stocks, lowering your risk, while still allowing you to receive a dividend. As always, if you’re interested in learning more about dividend investing, I recommend you read or listen to “The Little Book of Big Dividends” by Charles B. Carlson, CFA” and read more on my dividend stock investing strategies.

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