Investors can hold income paying investments like GIC, mutual funds, ETF, bonds, stocks, credit portfolios and more.
What Is Dividend Investing?
Dividends are payments a company makes to owners of a company. When you own stocks that pay dividends, you are entitled to a share of the company's profits. This allows you to receive a stream of income on top of the equity growth.
Buying stocks that pay dividends can reward you over time, as long as you make smart buying choices.
The best strategy for dividend investing is instead of using the cash you receive as dividends to buy things like a new TV, or a sofa, you will instead use those dividends to purchase more dividend paying stocks. This strategy will ensure you receive a higher dividend payout the next month.
Are Dividends Safe?
When investing, try to look for dividend safety. This means how likely it is that a company will keep paying dividends at the same rate or higher. Yes, some companies increase their dividend payout each year. This is like earning a raise, and all you've done is own a piece of the company.
Yes, there are websites that rank dividend safety, but you can also do your own research to learn more. All you have to do is compare 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 it only were to pay $30 million in dividends. On the other hand, if it pays out $90 million in dividends, and profits fall by 10%, it won't be able to keep paying at this same high rate.
This, in turn, lowers your income. The $30 million payout could also decrease in this case, but by a much lower percentage.
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 will likely be less safe if the industry isn't stable.
Look for companies that have histories of stable income and cash flow. The more stable the money coming in to cover the dividend, the higher the payout ratio can be.
Strategies for Dividend Investing
Good dividend investors tend to focus on either a high dividend yield approach or a high dividend growth rate strategy.
With the high dividend yield approach, the focus is on slowly growing companies that have high cash flow. This allows them to fund large dividend payments, and it could provide you with an immediate income.
Using the high dividend growth rate, your focus is on buying stock in companies that pay low dividends but are growing quickly. This means you are buying profitable stocks at a lower rate and making a large amount of income over a five- or 10-year period.
During Coca-Cola's growth phase, the company traded at such a high price-to-earnings ratio that the dividend yield looked quite small. But new stores were opening quickly, and the per-share-dividend increased quickly as profits climbed. In this case, a buy-and-hold approach would have yielded more income as dividends added up. Using the dividend payments to buy more stock would have been a great strategy.
Investors may prefer one approach over the other. It all depends on whether your goal is immediate, stable income or whether you prefer long-term growth and profit.
When choosing a method, decide what level of risk you prefer. Think about how long you are willing to wait for your dividends to produce your desired level of income.
Some dividend investors are only looking to earn enough dividends to pay for certain things, like a car loan payment, or earn enough to pay for a vacation each year, or to completely replace their employment income to maybe retire early.
Dividend Investing Tax Benefits
Most income from dividends is taxed as ordinary income, but qualified dividend stocks held for a longer length of time like 60 days or more that are taxed at the lower capital gains tax rate.
