15 Things Every Dividend Investor Should Know

If you are looking for a stable income through investment, you can try dividend investing. It is an investment strategy involving investing in companies’ shares that pay their shareholders differently. This payment is known as a “dividend.” The company pays dividends as a portion of its profit to its shareholders, either in the form of cash or additional stock shares. One of the main purposes behind dividend investing is to allow shareholders to generate a stable income while reaping the fruits of the stock’s long-term capital appreciation.

Written by Kaloian Parchev

Last Updated: 04 July 2023

This post may contain affiliate links. You can find our full disclosure policy here.

When it comes to dividend investing strategy, investors prefer to buy dividend stocks of those companies that are well known to raise their payouts in the long run. As dividends come from a company’s profits, a company earning more profit is likely to pay a higher dividend. These companies perform well even during economic instabilities owing to their solid balance sheets and stable cash flows.

If done properly, dividend investing can prove itself a means to earn long-term wealth. That’s why, for all those interested in buying dividend stocks, we have compiled 15 points every dividend investor needs to know. Keep reading!

These services are featured in this article.

How Important Are Dividends to Total Returns

Over the years, dividends have made a significant contribution to market returns. A report by Hartford Funds shows that dividend income contributed 41% of the average total return by the S&P 500 from 1930 to 2022.

According to the same report from 2000-2009, the S&P 500 paid a negative return to shareholders due to the Dot com bubble burst in 2000. Even during this decade, dividends earned an 1.8% annual return.

Dividend Stocks Have Outperformed Non-Dividend Stocks over the Long-Term

Regarding the percentage of total returns, dividend investing calculator has always provided solid performance compared to its non-dividend counterpart. According to Hartford Funds, from 1973 to 2022, dividend payers paid shareholders 9.18% of their average annual return. Of these, S&P 500 alone returned 7.68%. This is in contrast to the 0.60% return of non-dividend payers.

After 2008, the last year of 2022 was the worst for the stock market owing to high inflation and growing interest rates. Hence, the S&P 500 declined by 18% but dropped its dividend payouts by only 7.6%. But in contrast, S&P 500 non-dividend payments fell to 21.1%.

Dividend Stocks Are Inflation Barriers

Dividend investing is a wise decision that keeps you away from inflation’s effects. This is so because if you buy dividend stocks of companies, dividend payments tend to increase over time, usually keeping pace with the rising prices.

A report by Fidelity Investments shows dividends representing 54% of the market’s returns during high-inflation decades. The same report describes dividends, representing 67%, 44%, and 73% of the market return during the 1940s, 1960s, and 1970s.

During these times, inflation was above 5% on average, while total returns dropped by 10%.

Dividend Stocks Have Won the Race against Inflation

Not only does dividend investing deliver solid returns during periods of high inflation, but the growing dividend over time has outpaced inflation. According to a report by BlackRock, from 1971 to 2021, the dividend payment by US companies has grown by 3.7% per year. This rise in dividends is more than 2% of inflation growth per year during this time. An American investment management company, The Vanguard Group, also reports that US dividend growth has crossed inflation by 5 percentage points over the last 20 years until October 2022.

This shows that if you buy dividend stocks,the rising dividend payments can help you maintain the purchase of other dividend-paying stocks.

Dividend Stocks are Less Uncertain than Non-dividend Stocks

If you buy dividend stocks, there are fewer chances of their value dropping than non-dividend stocks’ counterparts.

Regardless of rising or falling stock prices, investors receive a dividend from the company. Hence, there are fewer chances of volatility in their investment.

According to the Wisdom Tree report, during the last 64 years, dividend levels dropped in just six of these years, while in comparison, stock prices fell in 18 of these years.

The report also shows that stock prices are two times more volatile than dividend cash flow. Hence, if you decide between dividend or non-dividend stocks of a company, buy dividend stocks.

Dividend Investing Needs Consideration of the Payout Ratio

The payout ratio is the segment of a company’s earnings that it pays as dividends to its investors. A high payout ratio shows a company is paying more than it can afford; however, a low payout ratio indicates it is keeping most of its earnings for future growth.

According to analysts, a dividend payout ratio between 35% and 55% comes in a healthy range, and with this payout, the company has enough savings left to reinvest for its growth.

High-Yield Dividend Stock is Prone to Get Volatile

Buying dividend stocks that pay you a dividend yield above 10% is usually considered high-yield dividends. These dividend stocks are more volatile as they are more susceptible to market conditions or interest rate changes, affecting the dividend value.

According to analysts, high-yield dividends underperformed the market for seven of the last ten years until 2021. Usually, a dividend yield between 3%-6% is considered healthy as it provides a stable income for investors.

However, this concept doesn’t work in all industries. For instance, higher-yielding dividends in real estate investment trusts and utilities are very common and considered healthy as they generate consistent income for shareholders.

Hence, investors must consider the company’s business model before making investment decisions.

The Elite Group of Dividend Aristocrats & Dividend Kings

Dividend Aristocrats is the term used for companies in the S&P 500 that have consistently boosted their dividend payouts to shareholders for at least 25 years. Similarly, Dividend Kings are companies which have 50 or more consecutive years of dividend increases.

Some popular names in this category are:

• NextEra Energy
• Chevron Corporation
• Medtronic plc
• Realty Income corp.
• The Sherwin-Williams Company

These companies are financially strong, stable, and committed to returning value to shareholders. That’s why they are the top choice of most investors.

Also, these companies have performed better during inflation. The S&P 500 Dividend Aristocrats had a 6.21% drop last year in contrast to an 18.1% drop in the broader market owing to growing inflation and interest rates in 2022.

Dividend Growth Rate is Key to Dividend Investing

The dividend growth rate is the most important factor in dividend investing for beginners. This is because it indicates a company’s potential to increase its dividend payouts over time.

Companies that consistently grow their payouts to shareholders and do so at a healthy rate are considered stable investments.

Therefore, consider buying dividend stocks of such strong and stable companies, as they have a growing cash flow and are committed to returning value to their shareholders. Dividend Aristocrats are popular among investors due to their long dividend growth rates.

Dividend Growers Usually Have Strong Cash Flow

Strong cash flow is another important factor that needs consideration in dividend investing.This is so because,based on it, companies fund their dividend payouts and increase them over time.

Most dividend-growing companies have one thing in common: strong cash flows. As a matter of fact, companies that are generating high profits and cash flows can return value to their shareholders through increased dividend payments. Take wise decisions and buy dividend stocks of companies with strong cash flows.

Dividend Capture Strategies

The term dividend capture strategy indicates an investment technique that includes buying a stock before its dividend payment date and selling it shortly after the dividend is paid.

This phenomenon aims to benefit from the payment through dividend capture while avoiding any exposure to changing stock prices. The ex-dividend date is when a stock begins trading and doesn’t include the dividend payment in its price.

Investors who own the stock before or on the ex-dividend date can receive the dividend payment.

A Range of Industries and Sectors Have Dividend Stocks

Various sectors and industries have dividend stocks, including healthcare, financials, technology, utilities, consumer staples, and many others. Their dividend investing policies, payout ratios, and growth rates may vary depending on their business models and industry dynamics.

For instance, utility companies are usually considered to have stable dividend-paying stocks due to their regulated business models that ensure predictable cash flows.

Similar is the case with energy companies that have increased their best dividend stocks consistently in recent years.

Dividend ETFs are an Excellent Way to Build Diverse Portfolios

Dividend-focused Exchange-traded funds (ETFs) usually invest in divergent portfolios of stocks in various industries and sectors. This exposes investors to a wider range of companies, reducing their risk of exposure to a single stock.

Due to current inflation and the consistent increase in interest rates, most investors consider dividend ETFs a better option.

Dividend Stocks are Not Resistant to Market Downturns

Compared to non-dividend stocks, dividend stocks are more stable and less affected by broader market downturns. Still, they are not completely immune to them – as companies may experience cash flow declines during economic recessions.

Companies may face pressure to cut their dividends to achieve financial stability by saving this cash in such situations. During the recent 2020 pandemic, this phenomenon was observed. Around 190 US-listed companies stopped paying dividends during this time, and 33% of them have not restored their dividend until December 31st, 2022.

Dividend Stocks Can Perform Much Better during Fed Rate Hikes

During the high-interest rate period, dividend investing has shown strong performance. According to a report by Global X, from January 1960 to December 2017, almost 50% of the high-dividend stock’s return came from dividend payments at a time of high-interest rates.

Also, dividend investing books outperformed the market during seven periods of high-interest rates out of ten. Another report by Forbes shows how dividends played a crucial role in overall market returns in the past.

Thanks for the Read!