When building a dividend portfolio, it’s important to buy stock in quality companies – companies that will flourish far into the future. Dividend investing strategies rely on companies that generate income during both up and down markets.
Paying a dividend is a hallmark of blue-chip stocks that are historically bellwethers in the market. For example, companies like Exxon Mobil Corp (NYSE: XOM), McDonald’s (NYSE: MCD) or Walmart (NYSE: WMT). They’re more than just household names: They’re stocks with healthy dividends that have continuously rewarded shareholders.
Dividend investment strategy is built on stocks like these and others capable of generating consistent, reliable free cash flows. Choosing dividend stocks means reaping the dual rewards of a company that’s relatively insulated from major downturn (or growth) and capable of paying shareholders to hold the stock long-term.
Finding Dividend-Paying Stocks
How do you invest in dividend stocks? You need to qualify them first! Not every company offers a dividend and even amongst dividend-paying stocks there’s a diverse range of options.
The first and best way to start looking for dividend stock is to pick an industry you’re familiar with. You might have some knowledge of Financials or Utilities, which makes investing in these sectors a more responsible choice. If you understand the risks of a particular industry, you’ll know what you’re getting into.
- It’s important to note that some industries naturally have higher-paying dividends than others. Utilities, for example, tend to pay higher dividends than Consumer Staples.
Once you’ve selected an industry, it’s time to narrow down your options of dividend-paying stocks. Any stock screener can help you do this, including the one offered by your broker. Once you do this, you’ll be left with every company in a specific sector that pays a dividend. From there, you’ll need to evaluate your options to figure out which stocks are right for you!
Dividend Aristocrats
Another great way to find reliable dividend-paying stocks is to zero-in on the Dividend Aristocrats. This list is exclusively comprised of dividend stocks with a 25+ year history of raising their dividend payments. It’s full of blue-chip companies that meet the needs of a dividend investing strategy, as well as dividend growth investing portfolios.
A Note About REITs
Real Estate Investment Trusts (REITs) are a special type of real estate stock that usually pays a higher dividend than most traditional companies (4-12%). This is because they’re required by law to pay out 90% of their profits to shareholders, which takes the form of dividend payouts. REITs come with their own pros and cons, but are nonetheless an attractive option for dividend investors.
Pay Attention to the Ex-Dividend Date
The best time to invest was yesterday; the second-best time is today. When you find a dividend stock you’re confident in, don’t waste time in buying it. And, as part of a good dividend portfolio strategy, plan on holding that stock for as long as possible. The longer you do, the longer those dividend payouts will roll in.
Now, you might be asking, “can you buy a stock just before the dividend?” It might seem clever to buy a stock right before the dividend hits and sell it right after for a profit. Unfortunately, your clever strategy will be derailed by a usual share price adjustment/drop for the dividend.
The ex-dividend date is usually set two business days before the “record date,” which is the deadline for being a shareholder for a company and eligible for the dividend. The actual payout happens several weeks after…
- Declaration Date: Friday, 4/12/2017 (company announces its dividend)
- Ex-Dividend Date: Friday, 4/19/2017 (you must own the stock by this date)
- Record Date: Monday, 4/22/2017 (company begins accounting for payout)
- Payable Date: Tuesday, 5/10/2017 (dividend is issued on this date)
Investing in dividend-paying companies is all about holding for the long-term. Trying to get in before the ex-dividend date and selling after might net you a small profit (depending on share price), but your profits will almost inevitably evaporate via brokerage fees and taxes. Buy and hold dividend stocks!
Collect or Reinvest Dividends?
Once you own shares of a dividend-paying stock, you’ll need to figure out how you want to collect the dividend payout. You can either reinvest the payout by purchasing more of the company’s stock or accumulate payouts into your brokerage account as income.
Access our free reinvestment tool here: Dividend Reinvestment Calculator
Younger investors who have a longer time horizon are usually better off reinvesting dividends. Automatically reinvesting dividends sets up compound growth. Eventually, your total reinvested dividends will surpass the stock price of the company, allowing you to buy more dividend-paying shares at no cost to you. And, as those shares pay their own dividends, your investment continues to compound!
For older investors or those seeking passive income, taking the dividend as a payout may be a more attractive option. This simply means the dividend is paid out as cash into your brokerage account, where it can be withdrawn or invested in a different company.
Most dividend investors will actually utilize a strategy that touches both of these options: They’ll reinvest dividends over the majority of their life, then switch to payouts after retirement.
Time is the Key
The success of a dividend investing strategy is built on time. The longer you’re able to invest in dividend-paying stocks, the more those dividends will accumulate and the longer you’ll benefit from compounding payments. Focusing on proven dividend-payers will also mitigate your risk of volatility and bring stability to your portfolio. If you’ve got years ahead of you and a low tolerance for risk, it’s hard to beat a dividend investing strategy!
Good investing,
Rob Otman
