Dividend investing

What is Dividend Investing?

Table of Contents

When starting out, many beginner investors don’t fully understand what a dividend is and overlook how dividend investing can be included in a profitable investment strategy.

This is unfortunate since dividend investing can yield consistent dividend income which can be a welcome addition to an investor’s savings pot.

Dividends are a payment of some of a company’s earnings to individual shareholders who own parts of the company.

Dividends are typically determined by the company’s board of directors and can be distributed monthly, quarterly or annually.

While any public company may decide to distribute dividends, it is most often a well-established corp that does so. 

When creating a diversified portfolio, income investors tend to favor dividend-paying stocks.

This is because they create a regular stream of income. Over time, this can be reinvested into more shares and creates an exponentially growing income stream. Of course, the income can be supplemented by any side hustles you have.

Adopting this mindset makes it much easier to grow your wealth and income over time.


How to Start Investing in Dividend Stocks


To invest in dividend stocks, investors should remember that there is likely to be a minimum investment amount. Investors purchasing stocks directly may be required to make a minimum investment between $25 and $500. The exact amount depends on the company’s policies and the share cost.

If there aren’t any direct purchasing options, investors must open an account on a trading platform or brokerage so purchases can be facilitated on your behalf.


Finding Dividend Stocks To Buy


Once opened, investors can research using screening tools provided by stock brokerages and information on the Security and Exchange Commission’s website and through the stock exchange.

For example, the NASDAQ provides its dividend calendar and history tool to identify the highest-yielding stocks.

Sites like CNBC and Morningstar are also great resources and provide valuable research data once you have shortlisted a list of stocks that pay dividends. 

Within the S&P 500 Index, investors often look for dividend aristocrats which are companies that have paid and increased their dividends every year for 25 years and prove a record of consistent growth.

Alternatively, investors looking for a bundle of the best dividend stocks with greater diversity might decide to purchase ETFs.

A single ETF can give an investor exposure to many different stocks while offering lower expense ratios than mutual funds and requiring less maintenance than an individual selection of stocks.

One example is the Dow Jones Industrial Average (DIJA), which comprises 30 different stocks, many of which will pay quarterly dividends. 

Investors may consider looking at options for a real estate investment trust (REIT) which pools capital from different investors and makes it possible for them to earn dividends from real estate investments without managing or maintaining any properties.


Conduct a Quantitative Analysis


Next, you can do a deeper dive into each of the company’s and their financials through quantitative research methods.

While companies are required to file certain information, you might be wondering what exactly you are looking for. Start by answering question including:


  • What have their historical annual dividend payments looked like?
  • Is the company financially stable?
  • Have they steadily increased dividends over time?

The goal is to identify if a company has a history of financial stability and low volatility, which will suggest how reliable they will be in paying out dividends.


Review Dividend Ratios


A high yielding dividend stock may look appealing. However, dividend ratios will provide more significant insights into if a stock can maintain the same performance over a long period.

There are four main ratios to consider. 

First is the dividend payout ratio. The dividend payout ratio can be calculated as annual dividends per share (DPS) divided by earnings per share (EPS) or taking total dividends and dividing it by net income.

In most cases, companies that pay out more than 50% of their earnings are considered stable, with less opportunity to increase dividends later. To evaluate a dividend payout ratio, investors should make comparisons across the industry.

Another ratio that should be considered is the dividend coverage ratio.

This ratio is calculated by dividing a company’s annual EPS by its annual DPS. It indicates the number of times a company could pay dividends to its common shareholders using its net income over a specified fiscal period. A higher ratio is typically seen as more favorable.

Additionally, investors should use the dividend growth rate formula to determine a company’s long-term profitability since dividends are distributed from a company’s earnings.

To calculate the rate, dividends paid out in year two can be divided by dividends paid in year one.

Subtracting 1 from the result and multiplying by 100% will give you the investor a percentage growth rate.

Each dividend ratio provides unique insights into how dividends are paid out. An investor should use several different ratios to create a more holistic view as to how a dividend stock is performing.


Determining When to Buy


Before purchasing a dividend-paying stock, investors must be aware of the ex-date.

Any stock traded ex-dividend on or following this date will not receive the next dividend pay-out.

In most cases, the asset will be reduced in price by the amount lost in the expected dividend.

However, investors must still be mindful of the stock’s purchase date. This will ensure the purchase is done a minimum of one day before the record date, so the trade has time to settle, primarily if their strategy is based on consistent income.


Pros and Cons of Dividend Stocks


Before deciding that dividend investing aligns with your portfolio’s goals, it is crucial to consider both sides of the spectrum.


Pros and Cons of Dividend Stocks


Before deciding that dividend investing aligns with your portfolio’s goals, it is crucial to consider both sides of the spectrum.


Pros of Dividend Stocks


Using dividend stocks, investors can achieve portfolio growth through compounding.

While traditional stock market gains are continually fluctuating and difficult to predict, compounding can ensure interest increases due to dividend reinvestment. 

Investors can rest easy, knowing that the company’s dividend can be predicted based on a few key factors.

An investor can typically expect that a company with safe, reliable cash flows and a history of paying dividends will result in a high total-return.


Cons of Trading Dividend Stocks


Of course, dividend stocks are a great addition to any well-balanced stock portfolio.

But that doesn’t mean an investor should solely rely on them either.

When investors get too comfortable with the idea, they are likely to begin individual stock picking, which will leave a portfolio vulnerable to risk.

Another con of dividend stocks is that they are still stocks. This means that they will always carry some risk even if they offer dividends.

A second downside is the maximum amount of returns that can be earned.

While dividends can help achieve steady cash flow, they will never return profits to an investor as much as high-growth stocks.  

The final con of trading dividend stocks is the deceptive nature of dividend payments.

Income stocks face dividend cuts, missed payments, dividend elimination and stock-price crashes.

Therefore, selecting a stock with the highest dividend yield may not get you very far.


Shortlist of High-dividend Stocks


I’ve listed below some high dividend-paying stocks that investors might consider adding to their portfolio.

I’ve included both US-listed stocks and included some names from the UK’s FTSE 100. These high dividend stocks are good options if you want to diversify away from the US names.

There are plenty of others that you might consider, however, below are some of our favorites.


Imperial Brands (IMB.L)

Market cap (MM): GBP 12.8 billion

Industry Tobacco

Dividend yield: 11.92%

Imperial Brands is one of the largest tobacco companies globally, offering a dividend of 11.92%

Furthermore, the company has increased its dividend each year since 2012. For investors, this suggests a continued upwards trend as they receive their semi-annual dividend payout.


BP (BP.L)

Market cap (MM):GBP 47.9 billion

Industry Oil and Gas Producers

Dividend yield: 5.25%

Previously known as the British Petroleum Company, this multinational oil and gas company offers a high dividend yield of 5.25% while maintaining a high P/E ratio. Based on recent valuations, investors can continue to expect sustained growth.


EVRAZ (EVA.L)

Market cap (MM): GBP 5.4 billion

Industry Mining

Dividend yield: 9.07%

EVRAZ (EVR) is a vertically integrated steel, mining and vanadium business. As one of the world’s top steel producers, it has a dividend yield of 12.25% paid out on a semi-annual basis.


M&G (MNG)

Market cap (MM):GBP 4.7 billion

IndustryFinancial Services

Dividend yield: 9.03%

M&G engage in savings and investment businesses in the United Kingdom and internationally and has a dividend yield of roughly 9%.


JP Morgan (JPM)

Market cap (MM): USD 379 billion

Industry Financial Services

Forward dividend & yield: 2.57%

Even though JP Morgan, like other stocks, has dropped in 2020, the bank itself continues to be one of the most valuable in the United States and offers stability in the long haul.

Due to recent declines in prices, investors have identified this as a great buying opportunity.


Iron Mountain (IRM)

Market cap (MM):

Industry: Information storage enterprise information management

Dividend yield: 9.03%

Iron Mountain avoids double taxation by paying out 90% of taxable income to its shareholders. Although this REIT isn’t considered a high growth stock, investors looking for steady income tend to favor this stock.


PepsiCo (PEP)

Market cap (MM):USD 200.5 billion

Industry: Food & beverage

Dividend yield: 2.89%

PepsiCo has continued to see growth due to its diversity, including its food and snacks division that puts it ahead of its competitor, Coca-Cola.


Cisco Systems (CSCO)

Market cap (MM):USD 188.2 billion

Industry: Networking hardware & software

Dividend yield: 3.17%

Cisco creates many of the back-end systems that make the Internet possible, suggesting this stock can be relied on for years. The company itself continues to raise its dividend for the last nine years.


What is Dividend Growth Investing


With inflation, many investors end up making minimal profits. According to the Asset Management Firm, BlackRock, retail investors have typically underperformed the market, earning an average of 2.1% over the last 20 years compared to annualized returns of 8.2% from stocks and 5.3% from bonds.

As a result, dividend investing is a popular investment strategy in which investors have achieved rising income from their investment.

Dividend growth stocks provide the potential to increase dividend payments over time. For investors who want to be more involved in managing their portfolios or need additional income from their portfolios, dividend growth investing is the known ticket to financial freedom.


Final Word


When creating your portfolio, you must choose companies with a long track record for stability while comparing share price fluctuations.