What You Need To Know About Dividend Investing

What You Need To Know About Dividend Investing
Underwater by Julian Cohen. Why?

Without doubt, investing in companies that have a history of paying a dividend is an excellent method of collecting consistent, predictable returns from the market, as you can see below

For Many Years, Experienced Investors Have Relied On Dividend Payments To Help Power Their Portfolios Through Both Good And Bad Times

What Is A Dividend?

When a company makes a profit, it has two primary options:


1. Re-Invest In The Business

Many high growth companies choose this option.  They pay down debt, or expand their operations to generate more profit in the future.

2. Issue A Dividend To Shareholders

A dividend is a share of the post-tax profit of a company.  It’s distributed to shareholders according to the number and the class of shares held by them.


The amount and the timing of the dividend payment is determined by the Board of Directors.

For publicly quoted companies, dividends are usually paid on a quarterly or annual basis.

Dividends are often paid if a company is unable to reinvest its cash at a higher rate than shareholders.

Many large and established “blue chip” companies have a history of paying dividends.

Most importantly for investors, dividends from good companies should be predictable and sustainable.  Some companies, for example Coca-Cola, have been paying out uninterrupted dividends for more than a century.

Currently, more than 80 per cent of the 500 stocks on the S&P 500 pay a dividend, including companies like 3M, Chevron, Walmart, and McDonald’s.

Why Dividend Investing Is Powerful

It’s all down to the power of compound interest

Dividends profit when the distributions are reinvested back into the company.

This is perfectly illustrated with Coca-Cola. 

Had you invested $10,000 in Coca-Cola shares in 1962, 50 years later, you would have generated a holding worth $2 million. 

Dividends that are reinvested buy more stock, which produces more dividends, and so on.

The Advantages Of Dividend Investing

Dividends are an important way for companies to reward shareholders.  In the right situation, dividend stocks can be a powerful component in an investor’s portfolio. 

Here are a few advantages of dividend investing.


  • Companies can increase dividends over time.  By way of example, P&G has increased its dividend every year for 60 years.
  • Dividend investing can protect against inflation.  Since 1912, dividends have increased 4.2 per cent per year.  Inflation has increased at just 3.3 per cent per year.
  • Dividends create intrinsic value, as they generate cashflow for investors.
  • Dividends can help combat volatility.  That’s because the dividend yield increases as the market price of a stock falls, making the stock more attractive.
  • Companies can’t fake dividends – a company either declares a dividend, or it doesn’t.

The Ten Commandments of Dividend Investing

Dividend investing has taken the world by storm in the past few years, as investors have been looking for yield amid historically low interest rates. 

As such, it is as important as ever to follow the basic rules of dividend investing, as well as keeping simple tips and tricks in mind.

  • 1. Thou Shalt Not Covet Thy Neighbour’s Yield
  • 2. Thou Shalt Always Reinvest Dividends
  • 3. Honour Thy Tax Implications
  • 4. Honour Thy Payout Ratio
  • 5. Thou Shalt Understand Foreign Dividends
  • 6. Thou Shalt Not Bear False Witness Against High Yields
  • 7. Thou Shalt Favour Companies That Raise Their Dividends Consistently
  • 8. Thou Shalt Not Make Dividends Thy Only Priority
  • 9. Thou Shalt Be Wary of Value Traps
  • 10. Thou Shalt Be Mindful of Special Dividends

Click the next link to read a detailed description of the above 10 rules that could make you a more successful dividend investor.

The Power Of Dividend Investing

dividend

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