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Dividends result in more shares . Using a dividend reinvestment strategy or dividend reinvestment plan ( DRIP ) will result in each of those incremental payouts building commission free equity in your position , which in turn results in bigger dividend payouts the following quarter .
2 . A Strategy for Investors , Not Traders
When choosing a dividend investing strategy , it is important to develop a long-term investor ’ s mindset . To the dividend investor , a share of stock is a living , breathing piece of a company , not solely a vehicle for capital appreciation . By looking at the investment as such , you will not be disappointed by what will likely be a slower growth rate than non-dividendpaying stocks . The most important factors in their overall investing strategies are :
1 . The long-term growth and financial prospects of the company . 2 . The current and long-term financial health of the company . 3 . The health of the company ’ s dividend and the ability for its payout to increase over time . 4 . Management ’ s treatment of investors .
3 . Successful , Long-Term Investors Choose Dividends
Warren Buffett has been called a value investor . Indeed , he has historically purchased shares of companies when they are being sold at a discount to their inherent worth . But , if you review the top 10 holdings of Berkshire Hathaway , you will also find each position constitutes a dividend paying security . If dividend stocks are the investment of choice for the most successful investor in history , shouldn ’ t they be good enough for your personal investment portfolio ? Buffet loves dividend-paying stocks because they add another , more stable form of capital appreciation above and beyond share price increases .
How to Choose the Best Dividend Stocks
As with any investment , it is imperative to do your research when choosing a dividend stock . The most important things to consider when determining the correct dividend stock for your portfolio are :
1 . Long-Term Prospects
Dividend investing is a long-term investing strategy . When asked what his favorite holding period for stocks is , Warren Buffett is reputed to have replied , “ Forever .” This is a dividend investor ’ s mindset .
As a dividend investor , you never want to sell because this ruins your long-term investing strategy . So you must carefully choose companies with the long-term staying power and ability to thrive despite economic conditions . Seek corporations that grow , regardless of external economic conditions . Even dividend investors have to sell from time to time , when the underlying business or strategy changes .
2 . Financials
If you can ’ t read a balance sheet , research the company ’ s bond ratings . You want to invest in the companies with the best credit ratings ( investment grade or above ). If you are familiar with reading financial statements , you will want to look at all of the traditional valuation tools , including the P / E ratio , price / sales ratio , Enterprise Value / EBITDA , and book value .
The company ’ s outstanding debt structure will also be important to understand , as a corporation ’ s creditors will get paid before the shareholders in any financial downturn .
3 . Management and Dividend History
Look for companies with management teams that have a reputation for being investor-friendly . Consider the management ’ s historical treatment of dividends and share buybacks , as well as the ability to navigate difficult financial times . Has management ever suspended or lowered its dividends ? Has the company ever missed a dividend payout ? Or has the company consistently grown its cash reserves and increased its dividend yield over the years ?
4 . Competition
If someone will be putting this company out of business in a few short years , there ’ s no point in owning the shares as a dividend investor . Remember , fads come and go , but excellent companies with long-term staying power have the ability to navigate difficult financial waters while emerging as a leader in their industry . Look for industry leaders with staying power .