This week I will be talking about a subject that is very near and dear to me, and that is dividend investing. What is dividend investing? For the purpose of this post, dividend investing is purchasing shares of public companies, ETF’s, Real Estate Investment Trusts (REITs) or mutual funds that pay quarterly or monthly dividends.
I prefer dividend investing as a primary investing style for several reasons:
- Stable and predictable cash flow: Most dividend paying companies pay out consistently on a monthly or quarterly basis. This allows me to more accurately predict my total returns vs a growth oriented company, where the stock price could trade in a more volatile fashion.
- Safer investment: A company usually doesn’t pay out a dividend unless it has sufficient cash flow from operations to do so. A way to look at how safe a company’s dividend is, simply look at the payout ratio on the company’s financial statements. This number represents the percentage of a company’s profits paid out in dividends. The lower the number the safer it is. I consider a number under 80% to be safe. As stated in the bullet above, dividend stock prices also tend to trade in a less volatile manner.
- A good alternative in low interest rate environment: As I write this, interest rates in many countries around the world are at or near 0%. If you are a bond investor in today’s environment, you are getting almost no return on your money. Investors seeking yield will have to move up the risk curve (preferred shares, and dividend stocks) to find the yield that they need to achieve their financial goals.
- Compound returns through dividend reinvestment plans: Many companies allow you to reinvest your dividends commission free. This allows your capital to compound much quicker over time.
- Lower trading costs: Because this is a long term investment strategy, trading only occurs when you are investing new money or re-balancing your portfolio. As a result, trading costs will be much lower over time which goes a long way to enhancing returns.
At the same time of this posting, I also posted what I’m going to call my “Options2Riches Dividend Portfolio.” This is what my portfolio is as of today so I invite you all to check it out. Perhaps you have better dividend ideas than me. If you do, I’d love to discuss them with you. Until then, I will talk to you guys next Tuesday!
Have a Great Day!
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