Why do you invest in dividend growth?
While dividend payments will grow at a slower pace than capital appreciation of a share of stock, in general, investors can rely on increasing dividend yields to boost returns over time. The power of compounding, especially when reinvesting dividends, can indeed become quite a lucrative strategy.
A company consistently increasing its dividend payments over time is a clear indication of a company that is steadily generating profits and is less likely to have its basic financial health threatened by the temporary market or economic downturns.
There are a couple of reasons that make dividend-paying stocks particularly useful. First, the income they provide can help investors meet liquidity needs. And second, dividend-focused investing has historically demonstrated the ability to help to lower volatility and buffer losses during market drawdowns.
Calculating the dividend growth rate is necessary for using a dividend discount model for valuing stocks. A history of strong dividend growth could mean future dividend growth is likely, which can signal long-term profitability.
Dividend investors should seek out companies with long-term profitability and earnings growth expectations between 5% and 15%. Companies should boast the cash flow generation necessary to support their dividend-payment programs. Investors should avoid companies with debt-to-equity ratios higher than 2.00.
Are Dividends Part of Stockholder Equity? Dividends are not specifically part of stockholder equity, but the payout of cash dividends reduces the amount of stockholder equity on a company's balance sheet.
- Pro #1: Insulation From The Stock Market. ...
- Pro #2: Varied Fluctuation. ...
- Pro #3: Dividends Can Provide A Reliable Income Stream. ...
- Con #1: Less Potential For Massive Gains. ...
- Con #2: Disconnect Between Dividends & Business Growth. ...
- Con #3: High Yield Dividend Traps. ...
- Further Reading.
To attract investors, companies with high dividend yield often pay dividends at levels that make it difficult to reinvest into the business, sacrificing potential growth as a result. A dividend growth strategy, on the other hand, invests in companies that consistently grow their dividend.
- Dividends are not guaranteed. A company may decide not to pay dividends any further. ...
- Another con of dividend investing for passive income is the eventual ceiling of returns. ...
- Although companies with a very high dividend yield may seem appealing, they are extremely likely to reduce their dividend.
Dividends are periodic payments made by companies to owners of its stock. They are a means for a company to share some of its revenue with those who own an equity interest in the company. Dividends are beneficial to shareholders because they represent additional return on investments.
Is dividend growth investing a good strategy?
Overall, dividend investing can be a great way for investors to generate income, achieve long-term growth, and reduce portfolio risk.
If you are looking to create wealth and have a longer time horizon, staying invested in growth will enable you to enjoy longer returns. But if you are looking for a more immediate return and steady cash flow, dividend investing could be the best choice for you.
A dividend growth rate measures a company's ability to increase the dividends it pays to shareholders over time. You can express this rate as a percentage by comparing the current dividend per share to the dividend per share from the previous period.
A high dividend yield can be appealing since you're getting more income per dollar invested, but a high yield isn't always a positive thing. It could mean that the company's stock price has been falling or dividend payments have been increasing at a higher rate than the company's earnings.
- XOM118.63-0.06% Exxon Mobil Corporation.
- JNJ144.770.32% Johnson & Johnson.
- KO58.510.45% The Coca-Cola Company.
- MCD269.954.52% McDonald's Corporation.
- MDT79.08-0.17% Medtronic plc.
- SHW310.161.78% The Sherwin-Williams Company.
- CTAS668.511.95% Cintas Corporation.
- EMR109.81-1.68% Emerson Electric Co.
| Dividend Stock | Current Dividend Yield* | Analysts' Implied Upside* |
|---|---|---|
| Johnson & Johnson (JNJ) | 3.1% | 25.3% |
| Merck & Co. Inc. (MRK) | 2.4% | 10.6% |
| Chevron Corp. (CVX) | 4% | 30.8% |
| Coca-Cola Co. (KO) | 3.3% | 18.1% |
The choice between the two depends on your risk tolerance, investment goals, and time horizon. While bonds can provide more predictable income and stability, dividend-paying stocks can offer growth potential and higher income over the long term.
Dividend capture specifically calls for buying a stock just prior to the ex-dividend date in order to receive the dividend, then selling it immediately after the dividend is paid. The purpose of the two trades is simply to receive the dividend, as opposed to investing for the longer term.
| Stock | Trailing annual dividend yield* |
|---|---|
| AT&T Inc. (T) | 6.3% |
| Verizon Communications Inc. (VZ) | 6.3% |
| Healthpeak Properties Inc. (DOC) | 6.6% |
| Altria Group Inc. (MO) | 8.8% |
They offer relative stability, may pay increasing amounts over time and may provide steady income. But relying too heavily on dividend stocks as a primary investment approach could put you at risk and reduce your long-term investment gains.
What is considered a good dividend yield?
Dividend yields over 4% should be carefully scrutinized; those over 10% tread firmly into risky territory. Among other things, a too-high dividend yield can indicate the payout is unsustainable, or that investors are selling the stock, driving down its share price and increasing the dividend yield as a result.
But with the right stock portfolio, you can enjoy peace of mind as you live entirely off the dividend payments you earn. It sounds too good to be true – but it's entirely possible, and people around the world are doing it right now. You can too – it just takes a bit of education and the right tools.
Truth be told, the growth options can benefit long-term investors. Nonetheless, investors who want to receive regular payouts prefer the dividend reinvestment option. So, you must consider a few parameters to avoid investing in a fund that does not suit your requirements.
Do your homework. No matter what stage of life you're in, dividend-paying stocks can be a great way to supplement your income and improve your portfolio's growth potential. Just be sure you research the companies' overall financial health, not just their dividend rates, before investing.
Dividend Stocks are Always Safe
However, just because a company is producing dividends doesn't always make it a safe bet. Management can use the dividend to placate frustrated investors when the stock isn't moving. (In fact, many companies have been known to do this.)
