Dividend Income Investing

Investors know that they have to tie their money to a value or brand to keep it growing. However, a lot of investors are confused by the many terms and safe options for dividend investing.

What is Dividend Investing?

If I own a public traded company for example, and you choose to invest in my company (by buying stocks/shares), you become a shareholder. At the end of my company’s business year, the profits my company makes is shared proportionately among shareholders. These payments are called dividend payments.

You are paid dividends depending on the ‘quantity’ of your investments in the company. However, not every company pays dividends to its shareholders; some choose to re-invest in the business, while other companies might save some part or all.

For example, Coca-Cola might value its shares at $100 each, a 5% annual dividend yield (stated at purchase) will mean that you get $5 each year in dividend payments.

How do I choose good investments?

When evaluating the best way to invest in a company, there are two things you need to watch out for;

The dividend growth

is how quickly a stock will increase in the dividend payments it gets over a certain period. Sometimes, it is measured on an annual basis, monthly or quarterly.

DGR = (New div – Old div)/Old Dividend) * 100

If my company pays $10 in dividends and then changes it to $11 next, it has a Dividend Growth rate of 10%. This formula is straightforward but now obsolete since you will be considering the rates over a long period.

When the rates increase wildly, people also calculate the average mean of all the rates. For example; if

Year 1: 10%

Year 2: 8%

Year 3: 12%

Year 4: 9%

The average dividend growth rate is 9.75%.

Re-investing your dividends will provide compound effects income and will fetch you more than removing your income.

A high dividend growth rate (DVGR) and yield are the best for your investments.

Other factors you should watch out for are;

Payment ratio:

It is the ratio of company profits to dividend payments. A PR of 50% means the company pays half of its profit on dividends.

Dividend yield:

It is the percentage of dividends a company pays. A high DY of over 10% could be a risky investment.

Dividend Investment Options

Dividend Aristocrats

Another way to evaluate or decide about a stock is to seek high-yield dividend stocks like those on the S&P 500 dividend aristocrats. Dividend aristocrats companies all have a thing in common; consistency.

S&P 500 companies are companies that have;

Increased their dividends every year for the past 25 years
Meet up a float-adjusted capitalization of at least $3 billion
Have at least an average trading value of $5 million.

These attractive records make Dividend aristocrats one of the most reliable and high paying dividend companies to invest in their stocks.

The following companies have had 57 consecutive years of Div Growth and are among the top 65;

Coca-Cola 3.60%

Colgate-Palmolive 2.34%

Dover 2.02%

Emerson Electric 3.75%

Dividend-paying Exchange Traded funds (ETF)

Dividend-paying ETF is a good way to diversify your funds and secures your investments. In ETFs, you do not own the underlying assets; rather you own just a portfolio of a lot of stocks. The fund will pay out an income that you can choose to re-invest or take as income. For instance, DVY pays 4% on investments.

Dividend ETFs are safer; if one of your stocks cuts or discontinues in dividends, you can still get income from others. Some common types of ETF are;