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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.