Dividend Stock InvestingDividend stock investing, or just plain dividend investing, is simply investing in stocks that pay dividends. But which are the best dividend stocks? That depends on a lot of different factors, of course, the chief of which is your own objectives and investing or trading philosophy. [In case you haven't heard, I call my investing philosophy, Leveraged Investing, a hybrid version of option trading and value investing with a strong reliance on dividend stock investing.] Morningstar's latest dividend-related video . . . What Is a Dividend?What is a dividend? A dividend payout represents a portion of a company's earnings or profits which are paid out to the company's shareholders (usually) in the form of a cash payment.Each company's dividend calendar is unique, but most stocks that pay dividends distribute those dividends on a quarterly basis, declaring in advance the dividend payment dates. A small portion distribute monthly dividends and some may even pay out annually.
Dividend DatesThere are basically four dividend dates to be aware of when tracking your distributions. They are:
Calculating DividendsCalculating dividends is fairly straightforward although there are different categories and metrics involved. You can calculate in terms of:
Dividend Growth RateThe dividend growth rate (the annual rate at which a dividend paying company increases its distributions) is of crucial importance to the long term dividend investor.A company that consistently raises its distribution every year rewards its long term investors with compounding returns. And the greater the growth rate, the more powerful the compounding effects.
Dividend Payout RatioThe dividend payout ratio is calculated by dividing a company's dividend by its net income. The resulting number tells you what percentage of a company's net income is required to service or cover the dividend.Successful dividend stock investing requires that the investor pay close attention to both the payout ratio as well at the dividend growth rate, when evaluating a potential investment.
Dividend SafetyDividend safety is paramount to long term investing success. Current yield, future growth rates, payout ratios - none of these matters if you can't count on the security of your income investment.There are both fundamental analysis factors as well as pragmatic common sense questions to ask yourself when assessing the safety of a company's payout. This page also includes a solid 7 minute video from Morningstar's Josh Peters on the subject.
Reinvesting DividendsReinvesting dividends is a tremendous method to generate compounding returns on stocks that pay dividends. It simply requires that you use the proceeds of your dividends and purchase additional shares of stock.All else being equal, additional shares of stock will generate more money in dividends which in turn will purchase more shares of stock which then generates even more money in dividends . . . and so on and so on. [Also be sure to check out this related site article about creating your own customized dividend reinvesting program.]
Best Dividend StocksWhat are the best dividend stocks?That's a pretty subjective question. I don't believe that the best dividend stocks are those with the highest dividend yields. To me the best dividend stock is one that pays a robust but stable dividend, has a history of dividend growth, and has a healthy and sustainable dividend payout ratio. In the end, the best stocks that pay dividends are no different than the best stocks without a payout. Whether or not your long term investing plan emphasizes dividend stock investing, your investments should always be in high quality companies those with strong and stable earnings, a great balance sheet, and durable competitive advantages.
High Yield StocksWho doesn't love high yield stocks? There are basically three categories of high yield dividends:
Dividend Achievers and Dividend AristocratsIf you love dividend stock investing, then you love these kind of stocks.Dividend Achievers and Dividend Aristocrats are trademarked terms and form the basis of indexes that track the performance of dividend paying companies with a long histories of increasing their dividend payouts each year. For Dividend Achievers, that's a history of increasing annual dividends for 10 or more years, and for Dividend Aristocrats, that's a history of 25 or more years.
Dividend CaptureThe Dividend Capture strategy is a temptingly simply strategy to flit from one dividend paying stock to another, owning shares just long enough to qualify to receive the payout.Who needs a paltry four quarterly payouts when you can manufacture dozens, scores, even hundreds of payouts each year? Unfortunately, the strategy is difficult, if not impossible to implement effectively and successfully. Click here for a more indepth look at Dividend Capture.
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