The value metrics used by income investors for building a portfolio are often wrong. You don’t need to lose out on genuinely lucrative yields when you focus on the right dividend growth strategy. You’ll get back on track when you follow a strategy that’s designed properly.
During the past decade, the dividend strategies have dominated the stock market. Investors continued to place a huge premium on lucrative returns. Over a while, the market situation demanded participation from investors that paid high dividends. They left no leaves unturned in outperforming the market. The environment of low-interest rate influenced the dividend payout strategies of many large-cap companies as these companies were left with excessive debt. Instead of focusing on stocks with great returns, the investors are now going with companies that reflect a consistent growth of dividends. You may expect reliability from organizations that reflect consistent dividend payouts for decades, which remains unmatched by even the most eminent dividend payers. It has got nothing to do with the volume of business that an organization conducts. It proves useful with mid- and small-cap stocks as it in a similar manner as it does with the large-cap domestic players.
A dividend growth strategy thrives on the path of allocating a significant share of your portfolio to organizations that witness steady growth of dividends. A portfolio with that type of allocation safeguards your investment from volatility and risks attached to the slackening growth of the economy and rising rates of interest. A strategy that tastes success with dividend growth doesn’t let the volume of business or sector influence the choice of assets. On the contrary, it considers the fundamentals of a stock tied to the value metrics for placing a premium.
Stocks that yield high dividends have their downsides like that of their potential to grow. For any shareholder, dividends are the outcome. However, the shareholder value may erode if the company pays out higher dividends by reinvesting less in the business. Striking a balance between the dividends paid to shareholders and the growth potential is necessary for a company that intends to earn higher returns in the long run. Investors need to keep an eye on this factor while comparing dividend stocks.
Check out a few of the dividend investing strategies that are in use these days:
The Dogs of the Dow Strategy
A beginner investor can begin with a dividend investment strategy like the Dogs of the Dow. It’s one of the simplest of such strategies. Listing of stocks on the Dow Jones Industrial Average forms the basis of this investment strategy as the name suggests. Instead of tracking a broader set of stocks it’s much easier for the beginners to try dividend investing with only 30 stocks.
Michael O’ Higgins had promoted the Dogs of the Dow strategy in the year 1991. The book “Beating the Dow” had been a popular release during that year.
He had classified the “investment dogs” or 10 stocks with high dividend yields as the falling prices had amounted to rising yields. Dating back to1920’s the theory of O’ Higgins earned considerable support from the back-testing outcomes explained in this book. It turned out to be one of the simplest dividend investing strategies adopted by the experts and beginners alike.
The Dogs of the Dow proves to be an attractive and yet simple strategy. The Dow 30 has 30 constituents worth the highest yield out of which a set of 10 stocks constitutes the Dogs of the Dow. The portfolio of an investor gets shuffled when he opts for the Dogs of the Dow investment strategy. It enables a proper allocation of the holdings over ten stocks worth equal weight.
Changes are likely to affect dividend yields. Rebalancing the portfolio by including new stocks in place of some of the old ones is essential for investors that use Dogs of the Dow strategy. It’s the simplicity of this strategy that turns the Dogs of the Dow into a uniform return-yielding performer.
The DRIP plan in stock requires an investor to register for it. No Dividend payouts are allowed in the form of cash disbursements once the investor enrolls. Instead, he can use the money for buying additional shares.
You won’t be able to use DRIP with all dividend return stocks. You can make good use of the DRIP option once you pick a few biggies like ABBV, Wal-Mart Stores, and Procter & Gamble (PG). Investors ought to register with the DRIP plan of their chosen stock before the record date. It will help them become eligible for the following dividend payout that’s applicable on the reinvestment program. Instead of buying stocks directly, you’ll find it less expensive to utilize DRIP for reinvesting in the stock. Another advantage of using the DRIP is that the average cost price of the share for a specific period is taken into account while determining the amount paid towards shares. When buying stocks directly, you won’t have to meet the lowest or highest share price.
Investors have the option of enrolling in a DRIP plan either partially or fully. They may even assign a specific number of shares to the reinvestment plan. For instance, if you possess 100 shares of GE, you may consider allocating 50 shares to your DRIP. It gives you an indication that you may consider buying extra shares under the DRIP plan by reinvesting 50% of your dividends. The remaining is considered for a cash payout.
Investors are even able to utilize the DRIP program with even stocks that don’t have such an option. You may avail an alternative to the DRIP plan from the stockbroker. Charles Schwab and E*TRADE are among the notable brokers that offer a DRIP program.
The compounding aspect is one of the significant benefits of DRIP. You can begin with a few shares and raise the holdings in the future. Young investors find the DRIP method more suitable.
Investors should remember that the utilization of DRIP doesn’t make their investments subject to taxation. DRIPs don’t come for free. The dividend thus achieved from stock is entirely justifiable for tax. There aren’t any exceptions as you reinvest these dividends.
Investing in a dividend ETF
Investors find a lucrative starting point by investing in some dividend ETF, especially when they have a small amount of capital to begin investing. It allows more opportunities for diversification instead of engaging too much capital. The debate continues whether you ought to invest in some dividend ETF or individual dividend stocks. However, you must do your research on their benefits and disadvantages before stepping a foot forward.
If you possess a small amount of capital, you may explore dividend-paying stocks by investing with dividend ETFs. You’re bound to come across a wide variety of ETFs varying from ETFs offering high yields that track stocks with high dividend returns to ETF’s with rising company dividends.
Compared to the individual dividend-paying stocks, investing in some ETF has its advantage. It enables the investors to lower the commissions offered for buying different shares from a plethora of dividend-paying organizations. The path seems quite straightforward with the dividend ETF.
Besides, you may directly buy a dividend ETF and forget all about it. There’s no need for you to do your research on the stocks lying in your portfolio from time to time.
A natural way of building wealth and generating a dependable income stream is through investing in stocks that offer dividends. You’ll acquire a great return potential if you take on a higher degree of risk.
There’s no rocket science behind running these investments and tasting success with them. At the same time, you must understand and follow the basic norms.
Check out six rules of dividend investment that stood the test of time:
Opt for Quality Instead of focusing on Quantity
While comparing and choosing investments, the investor needs to consider the dividend yield. It’s undoubtedly an essential factor for him to decide. The figure can be deceptive, but the returns may be higher. In case the latest stock payout level isn’t sustainable for a long time, the dividends beating the current market conditions may soon dry up. REITs constitute an essential point of consideration while determining how the dividend payouts get influenced by market fluctuations.
You’re likely to achieve more stability in the long run when you sacrifice your short-term yield. You may expect a positive outcome by opting for the purchase-and-hold approach. The dividend stocks fetch lower income, but they bear much lower risks; that’s why they seem to be more reliable in comparison to other commodities.
Go For the Eminent Organizations
The stock market follows a cyclic pattern while repeating its moves. The performance history of a stock is undoubtedly the best measuring stick in choosing dividend investments. Investors look up to companies that have achieved the position “dividend aristocrat.”
During the past two decades, most of the renowned companies have resorted to some dividend payout extensions. The cash flow gets steady for these brands in the long run, and it helps them drop the anchor in the market.
Identify the Growth Potential
It’s crucial for most investors to research before signing up for a specific offer. The new company might come up with an impressive dividend offer initially, but you must check out the details of the offer. Besides, you must also identify their potential for paying out dividends by going through their returns history. Here lies the gap between investing and value investing. You’ll catch a view of profitability from the standpoint of dividend offers in the long run while checking the growth history of the company. There’s no point in checking the value for which the stick is currently trading.
Keep an Eye on the Payout Ratio
If the dividend payout ratio of a company seems to be favorable, then the company yields a safer investment option for you. The ratio determines how the company generates the worth of returns alongside the value of dividend that it could pay.
While picking a dividend stock worth high returns, you must back it up cautiously. Also, remember that the company is compelled to extend a certain portion of its earnings to you. The dividend that it pays out might get reduced when the company experiences a lower return.
Pull up the Right Mix
When it comes to concentrating assets on specific stocks or focusing on a particular market sector, it might lead through an argument. If your favorite companies reflect an exceptional track record, then it paves the way to achieve higher dividends in the future. On the contrary, it could mean more hassles for you under an economic downturn.
You’ll acquire more diversified holdings once you spread the assets over your investments yielding multiple dividends. It’s one way of minimizing your risks. If you achieve fewer dividends in a particular area, you may not feel the pinch of the loss as you witness the regular performance of your investment portfolio.
Check Out the Right Opportunity
Many of the investment experts follow a broader view while investing, but they’re also aware of the positions when they have to cut the losses. While making a dividend stock investment, you must catch the fine line that exists between the waiting period for your investment to yield a return and the point in time when it gets late.
With stocks that seem very lucrative initially, you may commit a natural mistake. Once your growth expectations aren’t met, you’ll start experiencing a hurdle. The stock might begin to decline after reaching a specific point, but you must identify the time when it starts falling. That’s why it’s even more vital for you to gain knowledge about the stock and know when to sit back and wait.
The Bottom Line
By developing the strategy for dividend investing, your portfolio is likely to gain exponentially as an investor. Identifying stocks fetching lucrative returns holds the key to your investment success. At the same time, it curbs your investment risks and assures diversity.
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