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Dividend investing is a great way for investors to see a steady stream of returns on their
investments. Though the world of dividend investing can seem conservative and basic on the
surface, there is a lot to know in the dividend world that can help investors create long term
wealth.
Here are 40 things every dividend investor should know about dividend investing:
There are really no hard and fast rules (in the United States, at least), regarding when a company
can pay dividends. Tradition (and expectation) still carries a great deal of weight, though, and it
has become the established norm for most regular corporations to pay dividends on a quarterly
basis. Many well-known dividend-paying companies like Coca-Cola (KO ) and Johnson &
Johnson (JNJ ) pay dividends on a quarterly basis.
What is commonplace in the United States is not necessarily so elsewhere. In many countries,
dividends are declared and paid once or twice a year. Chinese oil and gas giant Petrochina
(PTR ) and British spirits giant Diageo (DEO ) pay twice a year, while Novartis (NVS ) and
Siemens (SI ) each pay annual dividends.
Although it is the norm in North America for companies to pay dividends quarterly, some
companies do pay monthly. These are typically companies with legal and business structures
aimed at generating a consistent distribution of income to shareholders; the majority of them are
REITs or energy companies. Likewise, many ETFs (particularly those that invest heavily in
income-generating assets like bonds) pay dividends on a monthly basis.
See our complete list of Monthly Dividend Stocks
You can see the payout ratio of a company right next to where the annual payout is listed on all
Dividend.com ticker pages; take for example AT&T (T ).
It is also worth noting, though, that earnings (and earnings per share) are a byproduct of
accounting and not strictly real. Companies actually pay dividends out of the cash flow they
generate, though it is not common to see payout ratios calculated on the basis of operating or free
cash flow.
Learn everything you need to know about the payout ratio in The Truth About Dividend Payout
Ratio.
Consider the following to see the difference if the company in the prior example announced
that it was increasing its dividend by 15% (to $1.15 per share), some sites would report the yield
as 1.2% (1.115% rounded up), while some would continue to report 1% until the first payment at
the higher rate, at which point the yield would move up to 1.04% (three quarters of the old
$0.25/qtr dividend + one quarter of the new $0.2875 dividend).
If youre looking for lucrative income investing opportunities, be sure to check out our list
of High Yield Stocks.
In some cases, corporations issue preferred stock that carries a right whereby any unpaid
preferred dividends accumulate and must be fully paid before certain other payments (like
common stock dividends) can be made. Unpaid dividends accumulate and this type of preferred
stock is called cumulative preferred.
This is not to be confused with a stock that is trading cum-dividend, which refers to a stock
where a dividend has been declared and current buyers are entitled to that dividend (cumdividend means with dividend). Stocks cease to trade cum-dividend on their ex-dividend date,
which is listed on Dividend.com ticker pages (see table above).
Arguably the most accurate way to run such a model is to project a companys dividends for as
many years as possible, calculate a terminal growth rate, and then discount that back by the
appropriate discount rate. That discount rate should be the cost of the companys equity, whether
determined through the Capital Asset Pricing Model (CAPM) or some other method.
Some investors try to use a more simplified version of the model, like the one listed below:
Stock Value = D1 / R G
This version has the investor use next years anticipated dividend (D1), divided by the cost of
equity minus the estimated perpetual growth rate of the dividend (G). As an example, if a
company is projected to pay $1 per share in dividends next year, the growth rate is projected to
be 5%, and the cost of equity is estimated to be 8%, then the fair value for the stock is $33.33.
Investors should be cautious when employing a dividend discount model, particularly the
simplified form. The model assumes that a firms cost of equity never changes, that the dividend
growth rate never changes, and that the dividend growth rate is less than the cost of the firms
equity.
Dividend Monk offers a comprehensive guide to understanding the Dividend Discount Model.
Whats more, while the model is quite simple and requires very few inputs, the end result is very
sensitive to the inputs a small difference in the estimated growth rate or discount rate can result
in large differences in the implied value of the equity (in the above example, changing the
growth rate estimate by only 5% (to 5.25%) changes the fair value by 9% (to $36.36).
After 25 years, your $10,000 initial investment would have grown to nearly $59,000 without any
reinvestment; by comparison, that same amount could have grown to nearly $115,000 had you
regularly reinvested your dividends.
day. Likewise, the desire to reap the benefit of the upcoming dividend often spurs interest in the
stock ahead of the ex-dividend date, leading to short periods of out-performance.
In its simplest form, dividend capture can involve tracking those stocks that, for whatever reason,
do not generally trade down by the expected amount on the ex-dividend date. Investors may
notice that although a given company pays a $1 dividend, the stock only declines by an average
of $0.50 on the ex-dividend date. That being the case, an investor can buy the stock on the day
prior to ex-dividend (say, for $100), sell it on the ex-dividend date (say for $99.50), and the
collect the $1 dividend a few weeks later leading to a total return of $0.50 per share on the
trade (losing $0.50 on the stock, but gaining the $1 dividend).
Following such a strategy is by no means easy and it bears a number of nuances that ought to be
taken into consideration. For anyone looking to take advantage of this approach, be sure to first
read ourDividend Capture Strategy Guide for a more thorough understanding of the risks
involved.
Some investors prefer dividend-paying stocks because dividends are real and trackable. A
companys reported net income or earnings per share (EPS) is largely a product of accounting,
and may have little or nothing to do with a companys actual financial health. As a result,
devious executives and skilled accountants can make even a terrible company look healthy
through the lens of earnings and reported income.
Dividends are different. Dividends either appear in shareholders accounts or they dont and if
they dont, there are no accounting tricks that explain it. Dividends dont necessarily have to be
paid out of income, but paying dividends creates a paper trail of cash that is much harder to
manipulate.
This is not to say that a companys dividends are an accurate representation of a companys
financial health or liquidity. Companies can, and have, paid dividends with borrowed money or
sources of funds other than operating cash flow. Learn more about The Biggest Dividend Stock
Disasters of all Time.
It is typically true that a companys fastest growth days are behind by the time it initiates a
dividend. As many dividend-paying companies like Abbott Labs (ABT ), McDonalds (MCD ),
and IBM (IBM ) have amply proven, though, the initiation of a dividend does not preclude
further growth for a company.
The dividend income earned from the S&P 500 investment would have grown from $5,234 to a
whopping $32,416 over time, compared to that of the bond investment which has seen a steady
decline in annual income.
With a dividend-paying stock, investors do not lose to inflation if the dividend grows as fast as
(or faster than) the inflation rate. According to data collected by Robert Schiller at Yale
University, dividends from the S&P 500 have grown at an annual rate of 4.2% since 1912, while
the consumer price index (the most commonly accepted proxy for inflation) has risen by 3.3%.
Though Apple (AAPL ) is by far the largest U.S. stock by market cap, its far from the top
dividend payer. That title belongs to AT&T (T ), which paid out $9.7 billion in dividends last
year. That means AT&T pays out about $18,000 in dividends to its shareholders each minute.
See 7 Impressive Facts About AT&Ts Dividend.
owning/trading mortgage bonds, etc.), and their earnings are free of corporate taxes so long as a
legally-mandated minimum percentage of earnings are distributed to shareholders.
Sectors known for being reliable dividend-payers tend to share certain characteristics; to learn
more about these, read our guide to Dividend-Friendly Industries.
Tech companies can, and in many cases do, offer above-average dividend growth potential.
Companies typically initiate dividends at low levels relative to their payout capability, giving the
leeway these companies have to raise the payout ratio in the future. Whats more, if tech
companies can continue to grow faster than the market, it increases the probability of aboveaverage dividend increases.
Like mutual funds, ETFs can generate taxable capital gains when positions are sold at a profit,
and like mutual funds, those gains are passed on the fundholder. While most ETFs are highly
tax-efficient and run themselves in such a way as to minimize capital gains distributions, it is
nevertheless true that ETFs will periodically distribute these taxable capital gains to
shareholders.
Learn more about When an ETF Distribution Isnt a Dividend.
These distributions may look like dividends (and can generally be reinvested) and some financial
news sites may erroneously include them in reported yields, but they are not dividends they are
capital gains and taxed at an investors capital gains rate.
The concept of dividends goes back so far that the question of the first company to pay a
dividend is very much an open question. A French joint stock company, Socit des Moulins du
Bazacle, may well have been the first (the company was formed in 1250), and other companies
formed in the 16th century and early 17th century like Muscovy Company and East India
Company paid dividends to their shareholders.
The Hudson Bay Company was the first North American commercial corporation, and most
likely the first to have paid a dividend. That first dividend (paid 14 years after the companys
formation in 1670) was a whopper too 50% of the par value of the stock.
Looking for historical dividend stock data? Use our ticker pages to download important
distribution data to aid your analysis.
Famed investor Warren Buffett has come out in the past in favor of reinvesting dividends.
Investors should note, though, that Buffett generally does not follow his own advice in this
regard. While Buffett will add to his stock positions from time to time, he does not reinvest his
dividends as a matter of course; Berkshire Hathaway (BRK-B )has owned the same number of
Coca-Cola (KO ) shares for more than 15 years.
Be sure to see our Unofficial History of Warren Buffett for more insights on his personal life as
well as his success in the investing world.
The data also reveals that dividend-paying stocks tend to perform better during bull markets as
well as bear markets compared to their non-dividend-paying counterparts.
38. Good Dividend Stocks Have More Than Just Good Yields
Successful dividend stock investing is more than just selecting those stocks with the most
impressive yields. Dividend.com has created a system called DARS to reflect and evaluate
these other critical factors.
Relative Strength Relative strength is a well-established technical analysis concept that argues
that strong stocks tend to continue outperforming, while weak stocks tend to continue
underperforming. In DARS, relative strength assesses where a stock is relative to its 50-day
and 200-day moving averages to assess whether it is in an uptrend or not.
Overall Yield Attractiveness This is a subjective measure that evaluates both the size of a
companys dividend yield and its sustainability. Very high dividend yields tend to be quite
unsustainable and the stocks tend to have above-average risks, while stocks with very low
dividend yields are generally not worthwhile for long-term dividend investors.
Dividend Reliability While there are numerous examples of reliable dividend payers that hit
hard times, the reality is that the best predictor of a companys ability to continue paying
dividends is the number of years it has done so. Accordingly, the DARS Dividend Reliability
rating reflects not only the number of years that the company has paid dividends, but a subjective
evaluation of how likely it is that current payout levels can continue.
Dividend Uptrend The DARS Dividend Uptrend factor reflects the companys history of
increasing its dividend, as well as a subjective evaluation as to the likelihood of future payout
increases.
Earnings Growth Dividends are ultimately dependent upon income and income growth.
Accordingly, DARS tracks a companys a companys projected earnings growth to ascertain
and rate its ability and likelihood to continue paying (and/or raising) its dividend.
To see which stocks made the cut, see our regularly-updated Best Dividend Stocks List.