Employing a Dividend Strategy over the Long-Term
The whole premise with dividend investing Is to develop a reliable passive stream of income with an investment portfolio that grows over time. Obviously this doesn’t happen overnight it’s a process that you build upon over the years. In my own portfolio when I started investing I was capable of generating sufficient dividends to pay for a textbook and now I can offset my yearly cellphone bill. My goals for the future include developing a sizeable stream capable of paying for large items and possibly my mortgage payments.
Why is the dividend strategy the way to go?
The way a dividend portfolio operates if done correctly is simple - choose companies that are not tomorrow’s Facebook but companies that are capable of growing their earnings and dividends for the next 5,10 and 20 years. Warren Buffett has a great saying in which he says” I choose a stock I’d be happy to have if the market were to close for 10 years”. Investing is not a short term game, its a long term process that if done correctly can result in massive returns. What good is a 1000$ today when its 0$ tomorrow because of a speculative play. Dividend investing serves that middle ground; companies post a modest gain annually supplemented by dividend payouts that can be used for more shares or covering expenses.
Since dividend companies are very large, reliable and industry players we refer to them as blue chips. Companies that fall under this branch are banks, large retailers, utilities and others.
Recession proof This added bonus is a great asset, meaning that when many stocks are suffering (including blue chips), blue chip companies are most likely to sustain the smallest drop. For example, if we look at Johnson and Johnson versus Apple during the crisis of 08-09. During that period, Apple a growth company shed over 50% of its value while JNJ shed only 28% of its value. Loblaw’s a large grocer in Canada only lost 4.8%.
Dividend hikes are more common then you think: Another element of dividend stock– is companies are committed to rewarding shareholders with consistent dividend increases. A cardinal rule considering dividends is that once a company first issues a dividend they are extremely likely to keep raising it for the future. For example, AT&T a large telecoms company in 2000 paid dividends of 0.253$ per share/per quarter. Their most recent payout was 0.48$ per share/per quarter – an increase of 89% over 15 years!!!
How do I build my dividend portfolio over time?
The best ways to grow your dividend portfolio is by contributions occurring on a monthly or annual basis and by taking advantage of DRIP. DRIP or dividend re-investment plan is a perk only available with a dividend paying company. Instead of paying out your dividends in cash, the company will pay you in shares. Over time, this will grow your share count – without you purchasing additional shares. Many of times since this is done automatically you may be able to avoid extra commission charges!
Do companies cut their dividends?
The short answer is yes. But companies are unlikely to cut the dividend altogether – knowing that one of the reasons people own the stock is for the dividend.
Do I pick a stock because it has a higher dividend?
Do not pick a stock just because of a high yield. Choose a stock, based on its history, metrics, dividend payout ratio (ratio of dividends to net income). The payout ratio is simply dividends paid out / over the net income. A higher percentage indicates a larger proportion of money being distributed to shareholders. Also this is good for shareholders – it is not good when that money could be used elsewhere such as development of a company’s current assets or promoting organic growth. Remember, that dividends are paid out for the company’s profit – so some companies with a high yield are using it to attract shareholders only to drop the dividend in the future. Always ensure the ratio is sustainable!
Dividend stocks usually have less growth; how do I get higher returns if I want to own dividend stocks?
Unfortunately, during orientation I wasn’t provided with a magic eight ball. But they are a few ways to get some higher returns. Instead of picking individual companies, choose a dividend ETF covering many companies. Look for swings in the market and buy on the dips. Remember, you do not always need to stick to one industry or one company. It is good to seek dividends in another industry.
Check out the growth in a blue chip portfolio with dividend growers
Key: Remember dividend investing is a long term game, hopping in and out will result in useless transaction fees and you might miss out on crucial upward swings.
Disclaimer: All of the above information is my own personal opinion. I do not hold any position in the companies mentioned above and do not plan to initiate position in the next 72 hours. Please do your research before making any financial decision.