Investors who prioritize dividends and intentionally build a portfolio of dividend-paying stocks typically see massive rewards in the long run, often receiving thousands in monthly retirement income. Profiting from some stocks relies solely on increases in their stock price, but dividends essentially reward investors for holding onto shares. If you want to become a better dividend investor, here are three things you should do.
1. Focus on companies that increase dividends
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What largely makes you successful as an investor is seeing the potential in companies and capitalizing accordingly. You should make decisions primarily with the future in mind, not focusing solely on the past or current metrics. A company’s current dividend yield is important, but what dividend investors should strongly consider is its ability to increase its yearly dividend. Companies may pay the same dividend, but if one is increasing its dividend by 10% annually, it’s more attractive.
Certain companies that have increased their annual dividend payouts for at least 25 consecutive years become part of S&P Dow Indices’ Dividend Aristocrats list, while companies that have increased their payouts for at least 50 consecutive years are Dividend Kings. As a dividend investor, if you focus on either, you can be more confident in your investment. Any company that has managed to become a Dividend Aristocrat or King has shown it can withstand broader economic down periods and recessions and still have the proper cash flow to reward shareholders.
History shows that market down periods are inevitable; you might as well invest in companies that have the financial means to make it through such times.
2. Focus on dividend payouts, not yield
It’s common for investors to look at a company’s dividend yield before making investment decisions, but that can sometimes be misleading. Think about this: Dividend yield is based on the annual dividend payout relative to the company’s stock price. If a company pays out $5 annually in dividends and the stock price is $100, the yield is 5% — which is very lucrative on the surface level.
However, if the stock price drops to $50 for whatever reason, the dividend yield becomes 10%. By all means, a 10% dividend payout is seen as good, but when you consider the sharp price drop that led to that yield, you understand why that alone isn’t a good metric. It would be best if you considered what caused that sharp price drop.
Instead of a strict focus on dividend yield, examine a company’s dividend payout to get more insight into its financial health. The …….