A Dividend Investing Strategy
Dividends are one of my favorite ways to invest. Currently, my main, long-term, investing goal is investing more of my portfolio in stocks that pay dividends. But first, I knew I had lots to learn about dividends in general and how to pick the best dividend paying stocks. Here are my findings:
What Are Dividends? Dividends Explained:
A dividend is a sum of payments (which can be cash, shares of stock, or other properties) that a company pays to its shareholders, usually on a quarterly basis. They are a portion of the company’s profits and are usually distributed at a rate decided by the company’s board of directors.
Why Do Companies Pay Dividends?
Not all companies distribute dividends. Usually companies that do are mature, profitable and established companies. They do so because they want to make their stock seem more appealing (put basically). Companies that issue dividends are usually thought of as a less volatile, and therefore less risky, investment. (Read more about why companies pay dividends here.)
BUT, just because a company doesn’t issue dividends does not necessarily mean it’s not profitable and/or a bad investment. Many companies, particularly tech companies, don’t issue dividends because they reinvest any profit back into themselves. And many other companies opt for a combination of both: they will pay dividends but also reinvest some of their profits back into themselves.
Why Should Millennials Invest In Dividends?
Younger people have much to gain from dividends (and investing in general). We’ve all seen the statistics that money invested for ten years starting when you’re young, like 25, is worth more than money invested for 10 years when you’re, say, 45.
But, it seems that many millennials just aren’t interested. They’re just not interested in investing, in general. And when they do invest, they tend to invest in companies they’re familiar with, like Facebook. But these companies often aren’t the ones paying dividends (that’s not to imply you shouldn’t invest in companies you’re familiar with or that don’t pay dividends, it’s just stating a fact about how millennials tend to invest and some of the potential drawbacks with that strategy).
And another issue is the long term sustainability of these companies. To be honest, I like and use Snapchat but I’m not sure that Snapchat is going to be around 10 or 20 years from now. But will Coca-Cola (a company that has not only a long history of paying dividends, but has also been continuously raising them, even while, at the same time, their stock has been up and down and all over the place) be around years from now? I think yes, people will be loving and drinking Coke 20, 30, 40+ years from now. (More on why Coca-Cola is a valuable dividend stock here.)
S&P 500 Dividend Aristocrats
A special, elite group of dividend paying companies are called the Dividend Aristocrats. The S&P 500 Dividend Aristocrats are S&P 500 index constituents that meet certain size/liquidity requirements and have a history (25 or more years) of
- paying dividends and
- continuously raising the dividend payouts.
I think the S&P 500 Dividend Aristocrat Index is a fantastic, safe way to invest, and an especially good place to start if you’re new to investing. The index constituents span across all 11 sectors of the S&P 500 Index, and the Dividend Aristocrat Index has historically outperformed the S&P 500 index, with lower volatility over longer investment frames. (Check out more on the historical performance of the S&P 500 Dividend Aristocrats here.)
However, I’d like to note that there are many other great companies that also pay dividends that are NOT included in the S&P 500 Dividend Aristocrats, especially tech companies. This is because while they have a great record of paying dividends, and raising dividend payouts, they are simply too young or don’t meet liquidity requirements, etc. Investing in Dividend Aristocrats is a logical start to your portfolio, but also consider companies that don’t meet their requirements too!
Check out the S&P 500 Dividend Aristocrats complete list here (also includes a great analysis and an explanation on how to best utilize the list and pick stocks!).
If you’re brand new to investing and know nothing about any sector, I think a good place to start (though I always advise doing your own research and due diligence before making any financial decisions) would be investing in an ETF (read more about those in my article on stocks and basic investing here and in my article on passive index investing here), such as the SPDR S&P Dividend (SDY), that tracks the S&P High Yield Dividend Aristocrats Index, or something similar (or don’t feel limited to the S&P 500 index, there are also ETFs that track high yield dividend paying companies in the Dow Jones index).
I love dividend investing, and it’s a great fit for me. I like to invest in ETFs mostly, but I also invest in individual stocks as well, if I believe that I know the market well. And while this particular article has mostly focused on the S&P 500 index, I also like to invest in other indices as well. As always, do your own research and explore the many options you have for dividend investing and then find the right fit for you!
Do you already or are you going to invest in dividend paying stock? If you already own stocks that pay dividends, have you faced any challenges with your dividend paying stock (like figuring out taxes)?