Maximizing Returns With Dividend Investing – A Step-By-Step Guide
While dividend-paying stocks can turbo-charge your portfolio’s returns and help you reach financial goals sooner, a portfolio yielding maximum dividend investment returns doesn’t come easily, taking astute research and continuous management.
Overreach for the highest yield can still result in ‘dividend traps’ that simply can’t pay their dividends. A forward-looking valuation of the current business will help investors avoid these.
Choose the Right Stocks
Investors concerned with price gains might ignore dividend payers altogether, while those who are retiring (or even just starting out) should be focusing on stocks that generate significant extra income.
Aside from the pure capital appreciation from value stocks, dividend income tends to serve as a hedge against inflationary pressures and rising interest rates, while also cementing the worth of these investments for younger investors looking for ways to grow their accounts in preparation for retirement. In addition, look for dividend paying stocks with a strong, positive trend of increasing dividends over time: investing the dividends into other stocks might let you do better than just be able to earn the same yield over 30 years! Reinvesting your dividends is faster!
Consider Dividend Yield
A crucial benchmark when investing in dividend stocks is the ratio of dividends yield – i.e., the annual dividends paid out by a company over its stock price (expressed as a percentage figure).
And investors might select companies with unusually high dividend-paying stocks that meet their investment objectives and risk tolerance by using this metric to screen for candidates and then reinvest all of the dividends for compounding power.
But keep in mind that balance change is not something only large companies need to worry about; small companies can alter it too, just not by much. And, of course, while a high dividend yield is a reasonable starting point for investing, it should never be your only indicator. Don’t stop with yield. It’s also important to consider a company’s dividend-growth track record as well as its underlying business. For that matter, AT and T (also a high yielder) and Verizon both have high dividend yields, but vast amounts in debt on their books reflect billions of dollars in acquisitions that failed to deliver on the hoped-for synergies, instead saddling both companies with billions more in debt.
Don’t Chase High
Yields It might seem obvious that buying stocks from dividend-growth companies will pay off over the long run, while investors who choose companies with high initial yields end up buying on the expensive end of those stocks and, thus, lose.
An increase in the dividend payout could be a warning sign that all is not well; given the choice, you could be better off investing in stocks with low dividend yields but steady long-term records of growth.
A firm’s dividend would also go up due to the lower taxes and that could reduce the total returns for U.S. investor’s holding foreign stocks due to government tax withholding of foreign dividends. And, of course, compounding would help by building wealth. So, all in all, you should really pay less attention to yield-chasing as a strategy and look more carefully at a plethora of other important considerations, including company financial health and growth prospects.
Diversify Your Portfolio
Good dividend portfolios need stocks from many companies and across asset classes to reduce risk, and thereby increase the chance of meeting long-run investment objectives. We diversify both across companies and across asset classes to reduce overall risk, which means that no single holding will have a strong positive or negative impact on our total return. This is what is necessary to meeting our long-run investment objectives.
strategies with a tilt toward dividend yield (or growth) or that explicitly focus on spread across the market Capitalisation spectrum consist of individual sector, market, and style stocks; exchange-traded funds (ETFs) and mutual funds with a tilt toward dividend yield (or growth); individual company stocks; broad-based market indexes consisting of a diverse set of companies of various sizes, industries, and strategies with an eye toward diversification.
This strategy would involve picking different types of stocks that pay dividends, and also take advantage of dollar cost averaging so you get the full benefit of compunding. Lastly, re-balancing your portfolio might be necessary from time to time.
Monitor Your Portfolio
This kind of self-constructed, dividend-yielding portfolio that offers long-term and relatively stable income takes time. It also requires patience. Companies thus selected are usually sturdy businesses: even just small yearly boosts can compound – remember Warren Buffett’s long-term stake in Coke? While it probably won’t yield much in today’s market, you could have paid Berkshire half that price back then!
Another essential element of your financial education should be a regular review and, if necessary, a rebalancing of your portfolio that will help you to avoid a knee-jerk reaction to short-term events, or swings in your feelings. Of course, the effect of inflation should never be forgotten either – and that’s where a good tracking device comes into its own when it comes to helping you hang on to your spending power over time.
