Dividend Investing Payoffs Require Careful Thought
Dividend investing has long been considered a solid way to take advantage of individual company gains.
On its face, it sounds simple enough. Invest in stocks that pay high dividends. However, there is more to it than that.
There are some steps that are particularly important for dividend investors. For example, they should look for long-term investment opportunities. This means looking for companies that can be long-term plays, spanning not just years, but even decades.
Several dividend investment strategies have been developed, so here we will go over a few of them with you.
Stay the course
You’ve heard it said repeatedly that investing for retirement requires patience and diligence. This means not selling on bad news. Instead, you must have the wherewithal to handle the market conditions or events that may cause your stock, or stocks, to dip in price.
There is another benefit to staying the course when it comes to dividend investing. This relates to being able to enjoy the dividend payout increases that are typical. You may have heard it said that a company is doing a share buyback when they report earnings. While this is good news for investors, so is practice of dividend hikes, which are also common announcements when companies report their earnings.
Dividend hikes, which can occur as frequently as each quarter, are clearly beneficial for those on fixed-incomes. That’s because these hikes can be seen as the equivalents to bumps in their salaries.
An important thing to remember about receiving these dividends is the ex-dividend date. In order to receive the dividend payout, investors must be considered shareholders of record on the stock’s ex-dividend date. You can find this time information on the company’s investor relations site.
When in doubt, seek out the Oracle
Known as the Oracle for his knack for picking the best stocks, Warren Buffet is known as the Oracle in the investment world. He’s achieved some of his most significant returns from choosing stocks that pay dividends.
But there is a bit more to it than that for dividend investors. If you want to pattern yourself after Buffet, a main thing to understand is that companies in fast-changing industries will likely not be in your portfolio. That’s because Buffet is more of a slow mover in that he is not enamored with companies in industries that are subject to constant, or significant changes.
One of the sectors Buffet has little interest is retail. In early 2017, he dumped his stake in Walmart, despite its dividend payout. The reason relates to the ever changing landscape of retail that for now, is being shaken to its core by Amazon.
Instead of industries subject to such disruptive, fast changes, look for companies in industries that are changing less, or those that are not prone to fast changes that can negatively impact their earnings.
Take for example, the financials. While how they offer products, such as allowing customers to open and handle their accounts online, little else has changed for the industry. The banking system’s basic business model has not changed in decades.
There are no threats looming to threaten it. People still need accounts and access to credit and loans, and the banks and related institutions are still the primary sources to meeting these needs.
When highest doesn’t mean best
It is human nature to think that “larger” and “higher” automatically mean that something is better. That’s not the case with many things, as we learn, and that’s definitely not the case when it comes to selecting dividend paying stocks.
Don’t just look at the dividend amount, which is in dollars and/or cents. Also, look at the yield, which is a percentage of the current share price.
The Balance warns, often stocks have a high yield because the company is in trouble. The stock price may have fallen as a result, and you may not have the most up-to-date information about the company’s recovery after the slip.
“…and so when you look at the dividend yield based on the most recent dividend paid (which is always looking at the past) it will look high. A company can lower its dividend any time; which also results in the stock price dropping. Don’t invest solely based on dividends.” – The Balance
Investing in stocks that pay dividends is clearly a double winner. You get to enjoy any upward price moves, and the dividend payouts, and increases that come along with that investment.
Still, there are precautions you should take to make sure that parking your money with one of these companies pays off for you. Remember, this strategy requires for you to stay the course, so choose wisely, and of course, do your homework.