Why You Should Practice Dividend Investing

  1. What is Dividend Investing?

Dividend investing is a strategy of buying stocks that pay dividends in order to receive a regular income from your investments. This income is in addition to any growth your portfolio experiences as the stock in it gains value.

Dividends are payments a corporation makes to shareholders. When you own stocks that pay dividends, you are receiving a share of the company profits. Dividend investing allows you to create a stream of income in addition to the growth in your portfolio’s market value from asset appreciation.

Buying stocks that pay dividends can reward you over time as long as you make intelligent buying choices.

If the company you own shares of has a dividend reinvestment plan, or DRIP, you can choose to have your dividends reinvested to buy additional shares, rather than having them paid out as a profit. This is a useful strategy when your dividends are small, either because the company is growing or because you don’t own much stock.

2. Is Dividend Investing Safe?

Good dividend investors tend to look for dividend safety, or how likely it is that a company will continue to pay dividends at the same or higher rate. While there are companies that assess and rank dividend safety for different stocks, you can also begin to analyze a corporation’s level of safety by comparing earnings to dividend payments.

If a company earns $100 million and pays out $90 million in dividends, you’ll make more of a profit than you would if they only pay $30 million in dividends. However, if it pays out $90 million in dividends and profits fall by 10%, the company won’t be able to continue paying at this same high rate. This, in turn, reduces your income. The $30 million dividend payout could also decrease in this scenario, but by a much lower percentage.

NOTE: In general, companies that pay 60% or less of earnings as dividends are safer bets because they can be counted on for predictability.

Dividend safety is also determined by how risky or new an industry is. Even if a company has a low dividend payout ratio, your dividend payment is less safe if the industry is unstable.

Look for companies that have a history of stable income and cash flow. The more stable the money coming in to cover the dividend, the higher the payout ratio can be.

3. Dividend Investing Strategies

Good dividend investors tend to focus on either a high dividend yield approach or a high dividend growth rate strategy. Both serve different roles in different portfolios.

high dividend yield strategy focuses on slow-growing companies that have substantial cash flow. This allows them to fund large dividend payments and produces an immediate income.

NOTE: If a stock pays a $1 dividend and you can buy shares for $20, the stock has a 5% dividend yield. If you invest $1 million, you would receive $50,000 in dividend income.

high dividend growth rate strategy focuses on buying stock in companies that currently pay lower-than-average dividends but are growing quickly. This allows investors to buy profitable stocks at a lower rate and make a large absolute dollar income over a five- or 10-year period.

NOTE: During Walmart’s expansion phase, it traded at such a high price-to-earnings ratio that the dividend yield looked quite small. However, new stores were opening rapidly, and the per-share dividend increased quickly as profits climbed. In this case, a buy-and-hold strategy would have produced significant income as dividends increased.

Different dividend investors may prefer one strategy over another, depending on whether the goal is immediate, stable income, or long-term growth and profit. When choosing a strategy, determine what level of risk you prefer and how long you are willing to wait for your dividends to produce a substantial income.

4. Tax Benefits of Dividend Investing

Look for dividends that are designated as “qualified” to take advantage of tax benefits. Most income from dividends is taxed as ordinary income. However, qualified dividend stocks held for a longer period of time—usually 60 days or more—are taxed at the lower capital gains tax rates.

If you buy dividend stocks to get the dividend payment and then want to sell them quickly, you’ll have to pay your regular tax rate on the dividend income.

5. How to start dividend investing.

My recommendation is to start A Robinhood account (or use another platform if you aren’t into Robinhood. I prefer it because it is easy to use, I love the mobile app – which allows me to buy and sell quickly. From there, make sure to fund your account with some money so that after you do your research you can purchase your first dividend producing stock. The key here is to make sure you do your own research on dividend producing stocks in industries that you are interested in. I say this because if you aren’t interested in it, then you are less likely to hold the stock if it goes down in value, and you will also be less likely to continue your dividend investing going forward if you don’t have an interest in what the stock’s business is doing. I try to invest in tech, finance and crypto currencies because those are the industry’s most interesting to me. I wake up each day excited to read about the updates on new technology coming out, or to see what the big banks are doing – like how they are now buying up massive amounts of cryptocurrencies. Only after telling the public for years that crypto was a scam and not worth it….. Anyways, I will save cryptos for my post. 

6. Good Dividend Stocks And ETFs To Invest In

Bank of America $40 per share with dividend yield of 1.80

Coca Cola $53 per share with a dividend yield of 3.10

New Residential Investment $11.00 per share with a dividend yield of 4.55

Powershares S&P 500 High Dividend Low Volatility ETF $43 per share and a 4.74 dividend yield

  • SPHD tracks a dividend-yield-weighted index comprising the least volatile, highest dividend-yielding S&P 500 stocks.

7. What I personally am invested in now

My total investment portfolio is hovering at $4,184 dollars and about $770 dollars of that is growth on top of my initial investment – not bad for only starting investing in February. The breakdown of that is: 

  • AMD (Advanced Micro Devices) comes in at 9.13% of my portfolio with a minor 2% gain
  • Bank of America is 31.94% of my portfolio and is my only dividend producing stock at the moment, and it has produced a gain of 16.95
  • Dogecoin is measly 2.38% of my portfolio but also is my best return at 70% year to date.
  • Finally, Ethereum is my largest investment at 56.57% and a growth of 15.51%

8. Key Takeaways 

  • Dividend investing is a way to create a steady flow of income.
  • Look for stocks with stable income and cash flow.
  • Pick a strategy: high dividend yield or high dividend growth.
  • Set yourself up for tax benefits.