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Because it will. Today, there are so many more resources available to accelerate your learning. From it, you will learn the best practices for building your passive income stream from dividends. Or, just stick with me here and now. To learn from the things I got wrong as a beginning dividend investor.
Not Having A Dividend Investment Strategy Back in the day, I thought buying any old stock with a dividend was a dividend investing strategy. Today, I believe there are several ways to go about dividend investing. They are: High dividend income — low growth High growth — low dividend income Balanced growth and dividend income Just like my current approach to dividend-paying investments has evolved over the years to what it is today.
Your approach should depend on your age, risk tolerance, and financial goals. So, first of all, choose a dividend investing strategy. Next, stick with it over time. Finally, adapt your strategy as circumstances change. This next failure of mine is one of the basics you would learn from taking a course in dividend investing … 3.
I just identified a company name I recognized that offered a stock paying dividends. Those two things were good enough for me. Such as knowing if they were a Dividend King or Dividend Aristocrat. How about the dividend payout ratio? It is a good indicator of dividend safety. What about stock valuation? Well, if I wanted to buy. I believed the stock must be a good value just because I wanted it. And because it was in the news. But now, based on my current perspective. For fully researched stock picks delivered to your inbox every month.
That was my research. And those recognizable companies were often the ones that made the news. Because of how well they were doing. Thus, I often bought hot stocks that pay dividends. On the surface, this approach may seem okay. But what happened is that I often bought the stock of the moment. Only to see its price fall back to earth shortly after I made my purchase. Unfortunately, doing so was a bad recipe for making money with dividends.
Oh yeah. But they do offer it here. It often led me to get hyper-sensitive to the dividend yield. And what this meant for me was preferring stocks with high yields. And dismissing those with low dividend yields. Conversely, experience has indicated to me that some of the best dividend investments have low dividend yields. Ignoring Dividend Growth Because lower dividend yield stocks, often have the best prospects for rapid future dividend growth.
Unfortunately, the potential for dividend growth was not something I concerned myself with at the time. That was a big mistake. Okay, take a deep breath. And let me recap briefly as we explore this next point… 7. Nor did I do investment research or due diligence on my potential investments. Other than the fact it paid a dividend.
This also means I never knew when to sell. Because without having clearly understood reasons to buy. Neither you nor I have criteria to evaluate the right time to sell out. Often what I would do is sell my winners when I had them. Many times those winners I sold would go on to greater success. While I held my losers hoping to break even. Certain studies show that dividend stocks value stocks tend to outperform growth stocks very long periods of time.
And, I know that data can be used in different ways to tell different stories. So, rather than rely too much on external studies, I just like to run the numbers myself. My Personal Dividend Stock Portfolio So, you like the strategy and want to see what a typical dividend stock portfolio looks like? Some fun stats: I own 40 dividend stocks. I filmed the YouTube video before I owned my newest position of Chubb. I have been investing for over 20 years, but the bulk of my portfolio has been built in the last 10 years especially in the last 7 years.
A few times in my investing history, I have had to liquidate the lion share of my portfolio to fund a house down payment. I do not envision us moving anytime soon, and I do not anticipate selling my portfolio again. I tend to buy stocks of all sizes: large cap, medium cap, and small cap. I have made countless stock market purchase orders. My average portfolio current yield is 3. However, this is just my current yield, not yield on cost a really important topic covered later in this guide and throughout my YouTube channel.
I bet your time for a break from reading! To change things up a bit, I want to get you on over to my YouTube Channel, but I first want to give you a quick tour and some hacks. Make sure to check out my video descriptions. They always contain a write-up of the video with helpful insights and links. Also, my newer descriptions contain timestamps.
I know a lot of you have limited time, and those timestamps come by popular demand. Simply click a timestamp to fast forward to a particular point in the video that is of interest to you. If you head on over to My Playlists Tab , you can quickly find my videos broken down by sub-category. Head on over to My Videos Tab to see all of my videos in reverse chronological order. Just scroll down to see the older ones. Make sure to read the comments and participate in our thriving dividend investing community.
We are 29, dividend investors strong and each video contains a multitude of insights in the comments. I personally try to read and respond to most comments. Many of our older discussions will provide a wealth of information to you. One last bonus hack: Here on my blog, check out the tabs at the top.
I link to all of my important whitepapers, guides, and spreadsheets right here on my blog! Hope you find a video or two that you enjoy. When you come back, it will be time to discuss some metrics! I am, however, going to quickly outline the metrics that matter to me when selecting and managing my dividend stocks: Revenue Growth: I like companies that consistently growth their revenue over time. Gross Margins, Operating Margins, and Net Margins: I prefer companies that have sold margins, since such margins are indicative of a competitive moat in the form of brand and intellectual property.
And, great margins give a buffer should the company hit hard times. Of course, some industries are characteristically higher margin software, for example than others utilities, for example. With interest rates at historic lows, many companies these days have taken on huge debt to fund share buybacks and acquisitions.
Growing Cash Flows: Sometimes, net earnings do not tell the entire story. I like to look at the statement of cash flows to ensure that the business is growing true cash flow over time. Of course, there are always exceptions. Dividend Growth: I like companies that tend to grow their dividend over time. Those companies that grow their dividend get me to financial freedom the fastest because I can buy now and receive more dividend income with each year that passes.
Given an ending value, a starting value, and years elapsed, CAGR shows the average amount the given metric has grown per year on average. Payout ratios differ by industry. Utilities tend to pay out most all of earnings. Since these topics are a bit more involved, I have linked each of the terms in the prior sentence to my YouTube videos explaining them.
I love these metrics because they give a sense of how far along I am and how hard my capital is working for me. They literally show me the dividend yield I am receiving on my purchase price after holding onto a position for number of years. Market Capitalization: Simply put, market cap shows how much a company is worth. I like to diversify by all different market caps one reason I own 40 stocks , so I have exposure to small, medium, and large enterprises.
My average market cap tends to skew a bit larger. Dividend Consistency: Since I invest for dividends and dividends alone, I always enjoy understanding how many consecutive years a company has paid dividends and also how many consecutive years a company has increased its dividend. I always apply CAGR calculation to here to understand dividend growth over time, on average.
Share Price: Typically, I enjoy buying additional shares of my favorite companies when share prices are down and the stock is in value territory. Lower PE Ratios are good, as they indicate the company is trading at a lower multiple of earnings.
I want to now take a moment to pay homage to the phrase "Dividend Growth Investing" notice the word "Growth". I like those that exhibit both! This is so important because those companies that are actually growing have the financial means to grow their dividends. And, those companies that grow their dividends give me a higher yield on cost over time!
Meaning: My invested capital progressively works harder for me. I have time on my side, I can wait for the dividends to grow. And, after years have passed by, the compounding of those dividend increases gives me a huge yield on cost! At the end of the day, dividend growth investing works because of The Miracle of Compound Interest. Make sure to check out the YouTube video I just liked, to really understand how the math works. Dividends growing over time. Dividends being reinvested to buy more shares until one chooses to tap into dividends to pay bills.
More capital being invested over time. It all compounds tremendously over time! The key insight is that compound interest and time work on your side. Invested capital is important too, but if you have some time until your retirement or early retirement , that time and the nature of compound interest can get you a lot more cash flow than you would think!
Slow and steady wins the race. Dividend investing is for everyone! Where do I pull the metrics for my analysis? First and foremost, I like to go the actual corporation websites and pull their annual reports also called Ks. I have to spend some time digging, but I always prefer pulling data direct from the source.
Such annual reports offer the most helpful info on the income statement, balance sheet, and statement of cash flows. Worth noting: I also like to follow quarterly reports Qs , but I do not place quite as much weight. I also make use of the Nasdaq website.
Nasdaq is great for showing dividend per share history over time. Last, I like to make use of Yahoo! Finance offers great summarized data, but I always like to verify data just in case. I tend to suggest the following avenues to newer investors: Dividend Reinvestment Plans check out my YouTube video and also Large, Established Brokerages also check out my YouTube video.
The financial industry builds up a lot of data about how commissions can eliminate results. And, that is true for many investors who pay ongoing commissions. Dividend investing tends to be commission-friendly since one buys and holds forever. As such, as long as my buy commissions are less than two percent and my dividend reinvestment is free or close to it , I do not get too worried about commissions. I actually prefer to pay commissions if I can leverage a really big, reputable, and well-established brokerage firm.
No More Drama The stock market is full of drama. Dividend investing erases all the drama. In fact, I do not even care about my aggregate portfolio value, since I never plan to sell. When you buy and hold forever with no plan of selling, it truly is a liberating experience. You free yourself from the worries of stock market fluctuations. Of course, I do check my portfolio value form time to time just to feed by ego and as an overall signal if the companies I own are doing ok.
At the end of the day, the only metric I follow closely is my aggregate dividend income. Regardless of the economy, the types of companies I own tend to pay increasing dividends over time. Even during a horrible recession, I can watch my dividend checks come in at increasingly higher levels. And, I can measure the percentage of my expenses covered by such dividends. Even greater: When the stock market is in the gutter, I can take comfort that new capital and reinvested dividends are buying more shares at progressively lower prices.
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