Dividend Investing Is It Worth It?

Dividend investing is a strategy that involves buying stocks of companies that pay regular dividends to their shareholders. Dividends are payments that companies make from their profits to reward investors for owning their shares. Dividend investing can provide a steady stream of income, as well as potential capital appreciation if the stock price increases over time.

One of the benefits of dividend investing is that it can help investors cope with market volatility and inflation. Dividends can provide a cushion when stock prices fall, and they can also grow faster than inflation if the company increases its dividend payments over time. Dividends can also be reinvested to buy more shares of the same company, which can boost the compounding effect and increase the total return.

However, dividend investing is not without risks and challenges. Not all companies pay dividends, and those that do can cut or suspend them at any time. Dividend stocks can also underperform the market when growth stocks are in favor, or when interest rates rise and make bonds more attractive. Dividend stocks can also be overvalued if investors chase high yields without considering the underlying fundamentals of the company.

Therefore, dividend investors need to be careful and selective when choosing their portfolio. Here are some tips on how to invest in dividend stocks:

• Look for companies with a track record of stable and growing dividends. Stock screeners are essential in this effort—once you’ve screened for stocks with a history of dependable dividend payments, review their history to determine if the payments have steadily increased. Reliable hikes to dividend payments indicates a company’s commitment to returning profits to shareholders¹.
• Compare the dividend yield of different stocks within the same industry and the market average. Dividend yield is calculated by dividing the annual dividend per share by the stock’s price, which provides a percentage indicating your annual return on investment from dividends. A high dividend yield can be attractive, but it can also indicate that the stock is undervalued or that the dividend is unsustainable. A low dividend yield can mean that the stock is overvalued or that the company is reinvesting its earnings for future growth. A good rule of thumb is to look for stocks with a dividend yield that is higher than the industry average and the market average, but not too high that it signals a red flag².
• Evaluate the dividend payout ratio and the free cash flow of the company. The dividend payout ratio is the percentage of earnings that the company pays out as dividends. A low payout ratio means that the company is retaining more of its earnings for growth, while a high payout ratio means that the company is paying out most of its earnings as dividends. A good payout ratio depends on the industry and the stage of the company, but generally, a payout ratio between 40% and 60% is considered healthy. The free cash flow is the amount of cash that the company generates after paying for its operating expenses and capital expenditures. A positive free cash flow means that the company has enough cash to pay for its dividends and other obligations, while a negative free cash flow means that the company is burning cash and may have to borrow or issue new shares to fund its dividends³.
• Consider the total return and the dividend growth rate of the stock. The total return is the combination of the dividend income and the capital appreciation of the stock. A high-dividend stock may have a low total return if the stock price declines over time, while a low-dividend stock may have a high total return if the stock price appreciates over time. The dividend growth rate is the annual percentage increase in the dividend per share. A high dividend growth rate means that the company is increasing its dividend payments at a faster pace than its earnings, which can indicate confidence in its future prospects and attract more investors. A low dividend growth rate means that the company is increasing its dividend payments at a slower pace than its earnings, which can indicate caution or lack of growth opportunities.

To illustrate these concepts, let’s look at some examples of dividend stocks from different industries and compare their key metrics:

Source: Finviz. Stock data is current as of Nov. 8, 2023 and is intended for informational purposes only.

As you can see, the dividend yield varies widely among these stocks, ranging from 11.21% to 17.38%. However, the dividend yield alone does not tell the whole story. Some of these stocks have a high payout ratio, which means that they are paying out all or most of their earnings as dividends, leaving little room for growth or safety. Some of these stocks also have a negative free cash flow, which means that they are spending more cash than they are generating, which can jeopardize their ability to maintain their dividends. Some of these stocks also have a low or negative total return, which means that their stock price has declined or stagnated over time, eroding the value of the investment. Some of these stocks also have a low or zero dividend growth rate, which means that they have not increased their dividend payments over time, which can reduce the attractiveness of the investment.

Therefore, dividend investors should look beyond the dividend yield and consider other factors that affect the quality and sustainability of the dividend. A good dividend stock should have a reasonable payout ratio, a positive free cash flow, a high total return, and a high dividend growth rate. Of course, these metrics are not the only ones to consider, and dividend investors should also do their own research and analysis before making any investment decisions.

Dividend investing can be a rewarding strategy for investors who are looking for passive income and long-term growth. However, dividend investing requires patience, discipline, and diligence, as not all dividend stocks are created equal. By following some of the tips and examples in this story, dividend investors can hopefully find the best dividend stocks for their portfolio and achieve their financial goals.

References:

¹: How To Invest In Dividend Stocks – Forbes Advisor ²: 9 High-Dividend Stocks for November 2023 and How to Invest – NerdWallet ³: How to Invest in Dividend Stocks: A Guide to Dividend Investing – The Motley Fool : Dividend Growth Rate Definition – Investopedia

Sure, I can tell you some success stories on dividend investing with reference links. Dividend investing is a strategy that involves buying stocks of companies that pay regular dividends to their shareholders. Dividends are payments that companies make from their profits to reward investors for owning their shares. Dividend investing can provide a steady stream of income, as well as potential capital appreciation if the stock price increases over time.

Success Stories:

Here are some examples of successful dividend investors and their lessons:

• Warren Buffett: He is one of the most famous and successful investors of all time, and he is also a big fan of dividend stocks. He has built a massive portfolio of dividend-paying companies through his holding company, Berkshire Hathaway. Some of his top dividend stocks include Apple, Coca-Cola, Bank of America, and Verizon. He looks for companies that have strong competitive advantages, consistent earnings growth, and reasonable valuations. He also reinvests his dividends to buy more shares of the same companies, which increases his compounding effect. He once said, “Do not take yearly results too seriously. Instead, focus on four or five-year averages.”¹
• John and Jane: They are a retired couple who live off their dividend income. They started investing in dividend stocks in 2010, and they have grown their portfolio to over $1 million. They have a diversified portfolio of over 40 dividend stocks, with an average yield of 4.5%. They focus on companies that have a history of increasing their dividends every year, and they also reinvest their dividends to buy more shares. They have a monthly dividend income of over $4,000, which covers their living expenses and allows them to travel and enjoy their retirement. They share their dividend investing journey on their blog, Dividend Diplomats.
• Tom Scott: He is the founder and author of Dividends Diversify, a website that teaches people how to invest in dividend stocks. He started dividend investing in 2007, and he has built a portfolio of over 30 dividend stocks, with an average yield of 3.5%. He looks for companies that have a strong competitive position, a sustainable dividend payout ratio, a positive free cash flow, and a history of dividend growth. He also diversifies his portfolio across different sectors and industries, and he monitors his portfolio performance regularly. He says, “Dividend investing is a long-term game. It takes patience, discipline, and diligence.”

These are just some of the many dividend investing success stories that you can find online. They show that dividend investing can be a rewarding and profitable strategy for anyone who is willing to learn and apply the principles of dividend investing. If you want to learn more about dividend investing, you can check out these websites for more information and inspiration:

• 5 Dividend Investing Success Stories and Their Lessons
• The Most Successful Dividend Investors of all time
• [Dividend Growth Investing Success Stories]

I hope this helps you understand more about dividend investing and its benefits.

Dividend investing is a strategy that involves buying stocks of companies that pay regular dividends to their shareholders. Dividends are payments that companies make from their profits to reward investors for owning their shares. Dividend investing can provide a steady stream of income, as well as potential capital appreciation if the stock price increases over time.

However, dividend investing also has some disadvantages and challenges. Here are some alternative perspectives on dividend investing, and what are the drawbacks and other options for an investor.

• Dividend investing can expose investors to market risk and volatility. Dividend stocks are still stocks, which means they can fluctuate in value depending on the market conditions and the performance of the company. Dividend stocks can also underperform the market when growth stocks are in favor, or when interest rates rise and make bonds more attractive. Dividend stocks can also be overvalued if investors chase high yields without considering the underlying fundamentals of the company. Therefore, dividend investors need to diversify their portfolio and monitor their holdings regularly.
• Dividend investing can limit investors’ growth potential and tax efficiency. Dividend stocks tend to have lower growth rates than non-dividend stocks, because they pay out a portion of their earnings as dividends instead of reinvesting them for future growth. Dividend stocks can also generate taxable income, which can reduce the net return for investors in higher tax brackets. Therefore, dividend investors need to balance their income and growth objectives and consider the tax implications of their investments.
• Dividend investing can require more research and analysis than other strategies. Dividend stocks are not all created equal, and investors need to evaluate various factors that affect the quality and sustainability of the dividend. These factors include the dividend yield, the payout ratio, the free cash flow, the total return, and the dividend growth rate. Dividend investors also need to look for companies that have a track record of stable and growing dividends, a strong competitive advantage, a consistent earnings growth, and a reasonable valuation. Therefore, dividend investors need to do their own due diligence and avoid chasing high yields without understanding the risks.

Some alternatives to dividend investing are:

• Real estate investment trusts (REITs): REITs are companies that own and operate income-producing real estate properties, such as residential, commercial, industrial, or retail properties. REITs pay out most of their income as dividends to their shareholders, and they offer higher yields than dividend stocks. REITs also have built-in inflation protection, because they can increase their rents and property values over time. However, REITs are also subject to market risk and volatility, interest rate risk, and property-specific risk. REITs also have different tax treatments than dividend stocks, and they may not qualify for the lower tax rate on qualified dividends. You can learn more about REITs from this article.
• Closed-end funds (CEFs): CEFs are investment funds that have a fixed number of shares that are traded on the stock exchange. CEFs can invest in various types of assets, such as stocks, bonds, loans, or commodities. CEFs can offer higher yields than dividend stocks, because they can use leverage, sell options, or invest in higher-risk securities. CEFs can also trade at a discount or a premium to their net asset value (NAV), which can create opportunities for investors to buy low and sell high. However, CEFs are also subject to market risk and volatility, leverage risk, liquidity risk, and management risk. CEFs also have higher fees and expenses than dividend stocks, and they may generate taxable income that is not eligible for the lower tax rate on qualified dividends. You can learn more about CEFs from this article.
• Income funds: Income funds are mutual funds or exchange-traded funds (ETFs) that invest in income-producing securities, such as dividend stocks, bonds, REITs, CEFs, or preferred stocks. Income funds can offer diversified exposure to various sources of income, and they can simplify the portfolio management and rebalancing process for investors. Income funds can also offer lower fees and expenses than individual securities, and they can provide tax efficiency by minimizing turnover and capital gains. However, income funds are also subject to market risk and volatility, interest rate risk, credit risk, and fund-specific risk. Income funds also have lower yields than individual securities, and they may generate taxable income that is not eligible for the lower tax rate on qualified dividends. You can learn more about income funds from this article.

These are some of the alternative perspectives on dividend investing, and some of the other options for an investor. Dividend investing can be a rewarding strategy for investors who are looking for passive income and long-term growth, but it also has some drawbacks and challenges. Therefore, investors should consider their goals, risk tolerance, and tax situation, and diversify their portfolio with other income-producing assets.