Welcome to the second edition of The Wealth Wave newsletter. In this week’s edition we are going to delve into the concept of dividend investing. We will be discussing what this term actually entails, the benefits it possesses and also different strategies to help you understand this type of investing in much more detail.
What is it?
So what is dividend investing? Dividend investing involves buying stocks of companies that pay their shareholders a proportion of earnings in the form of what is referred to as dividends. Dividend paying companies are usually well established, and are able to generate a consistent profit year after year.
There are many benefits of dividend investing, some of which are:
Generating income: Dividend investing provides a reliable source of passive income on the assumption of smart investments by owning stock in companies that pay dividends. By utilizing this type of investment, investors can earn regular cash flow that can be reinvested, used as a second income or even used to retire early with.
Stability in volatile markets: No company is safe from a crisis - however, if a company is able to generate a steady profit with any market condition, then this means the stock price is much more safe that a company which cannot do this, thus making it a far more reliable investment overall.
Long-term growth: Reinvestment of dividends can accelerate the growth of an investment portfolio over time due to the fact that you are using the passive income to buy more of the stock paying you passive income. Furthermore, this helps in leading to increased future dividend payments and taking advantage of compounding.
There are a few different strategies applied by different investors when dividend investing, the main ones are:
Dividend aristocrat investing: Dividend aristocrats are companies that have maintained a consistent growth in dividends for a number of consecutive years (normally 25 or more). Investing in these types of companies has many benefits. The main 2 are that your dividends is constantly increasing even if you do not buy more stock. The second most prominent advantage is that if a company has been able to increase their dividends yearly for a long time, then this means that they are a very well established company that turns in a profit every year. Ultimately, this means that they have a strong and settled financial situation at the company, helping to create a steady pathway towards a safe investment.
Dividend yield investing: Dividend yield is the ratio of annual dividends per share owned. Investors are able to look and identify stocks with an above average high dividend ration to invest into in order to take advantage of the higher dividends. Although, if you choose to invest this way, you will need to be careful as it’s important to assess the sustainability of this high dividend ratio. This is because the higher the dividends typically means higher the risk of them being cut - so, it is vital to not solely rely on this type of dividend investing. If you are going to apply this strategy, make sure to conduct lots of research beforehand into particular companies that you are interested in.
Dividend growth investing: Dividend growth investing is a strategy where an investor will specifically target companies who have a great history of consistently increasing their dividends. They target these companies due to them showing (through consistently raising their dividends) that they are a strong organisation financially, and also have a commitment to return profits back to shareholders. Researching a company’s payout ratio, earnings growth and historic dividend growth rate can be great identifiers to if a potential investment is in fact a smart investment.
Dividend income is a favored investment strategy among investors all over the world, which can help to provide a steady income for reinvestment, early retirement or a great fund to hand down to your family. A great dividend portfolio brings stability during market volatility, as well as the potential for long-term growth over a long period of time. Now that you are all up to date on what dividend investing is truly about, go out and do some research of stocks that you would like to see if they fit the type of portfolio that you are looking to create/have. In our next edition, we will be showcasing some of our favorites and some well known dividend stocks, such as Coca Cola, Johnson & Johnson and my personal favorite Realty Income which pays dividends monthly!
It is essential to remember that with investing always comes with risks, and not all investments pay off. Despite this, with sufficient research, the odds of a great investment increases and so it’s always good to do your research and make sure that you have a plan and align your investments with that plan.
Happy Dividend Investing!
The Wealth Wave Team.