10 Dividend Investing Tips to Always Remember

Updated: October 25, 2023


In this article, I will discuss the 10 dividend investing tips to always remember as a dividend/income investor. These tips are crucial to remember as you invest in stocks for their dividends, especially over the long-run in times of interest rate changes, different markets, and short-term price movements.

Tip #1: Know Your Goals

The first tip, and arguably the most important tip, is to know your goals and what you're aiming for as a dividend investor.

You should have conviction in the dividend investment strategy and stick with it for the long-term, or you will fail to reap the benefits. Begin by setting small goals such as achieving $500 a year from dividends, and then set long-term goals such as paying off your monthly bills with dividends.

A goal many dividend investors hope for is to survive off dividends alone, which is a very difficult task for many and requires a lot of capital and time, although doable. In short, write down your financial goals, create an in-depth plan to achieve these goals, and then execute on it!

Tip #2: Stay Humble

As a dividend investor, one can easily become full of themselves as their dividends continue to grow rapidly year after year, especially with the most recent ~10-year bull market run.

One must ask themselves how confident they are in their dividend investments if the stock market were to crash 30% the next day. In particular, you should take into consideration what dividend stocks are more at risk of cutting their dividend and what your dividend return would be if they were to be cut during a recession, which is entirely possible.

Because you cannot predict every stock that does well, do not be biased on the investments you have made in the past. Always learn and be receptive towards feedback and take into consideration unforeseen markets.

Tip #3: Don't Listen to the Noise or Get Distracted

In the modern era, there is a lot of noise on what companies to buy and sell, and this includes dividend-paying companies as well. This "noise" refers to media outlets, friends and family, and really anything you read online.

You should stay focused on dividend investing because it's what's proven to work. Don't go after the new "hot thing" and focus on the long-term. In other words, although you can utilize other investment strategies, do not reduce your dividend investment research or monthly contributions as a result.

Moreover, there will always be people telling you that your investment strategy is wrong. So, keep your dividend investment strategy to yourself or communicate it with people who you trust.

Tip #4: Don't Always Ignore Low Dividend Yield Stocks

Granted, a starting dividend yield between 3-5% (with all else equal) is a better deal than a dividend yield between 2-3%. This is simply because you'll be getting more for your money.

However, when one owns these lower-yielding dividend stocks, the opportunity for a high yield on cost (YOC) 10 or 20 years down the line can be quite substantial. One example of this is 3M Company (MMM):

Therefore, although you should generally stick with starting yields above 3% when you're just starting, or if you have a smaller investment budget, it may be smart to allocate a percentage of your dividend portfolio to include stocks with yields below 3%. If you do this, just ensure it meets all other dividend-investment criteria.

Tip #5: Be Prepared for the Unexpected

As an investor, you should always understand the risks you're getting into. In short, stuff happens in life, and the stock market is irrational.

So, ensure that you have an emergency fund to protect your dividend portfolio investments. The last thing you'd want to do is cash-out early of an appreciating dividend stock. Aside from having an emergency fund and investing in a variety of assets apart from dividend stocks, you should also have a good mix of dividend stocks. This means investing in dividend-paying companies based on their industry and dividend yields, among other things.

Doing so correctly will protect your dividends and potential future growth, and will limit the loss in dividends you may receive from technology, retail, and oil, for example, which are typically more volatile industries.

Tip #6: Automate Your Investments and Reinvested Dividends

Keeping track of when you can invest more into your dividend portfolio and when dividends are paid out is exhaustive over the long-term, especially as your dividend portfolio grows. So, begin automating your investments and dividend reinvestment's to save time and ensure you're not losing out on the compounding effect.

Certain investment brokerages make this easy for investors, where you can automatically invest a certain amount every month into your dividend portfolio, and also automatically reinvest the dividends you receive as fractional shares.

In short, this is essentially what dollar-cost averaging is, and you can notch up this money overtime to further propel your dividend returns. From a personal finance perspective, this will also help you avoid temptation of spending the money on thing you don't really need.

Tip #7: Understand the Advantages of Dividend Investing

There are plenty of other ways to invest your money in the stock market, whether it be growth stocks, blue-chip stocks, industry-specific ETFs, and lots more. Although there is nothing wrong with these investments, the advantages below should be a good reminder on why dividend investing is such a great long-term strategy.

Advantage #1: More Stability and Less Downside

To begin, companies that pay out dividends consistently are more established, have likely had decades of success with growth and with branching into different industries, and tend to have more of a global presence than other non-dividend-paying companies.

In fact, over the last 93 years, dividend-paying companies in the S&P 500 have returned almost doubled the returns than companies who do not pay out dividends.

Here are three reasons that may explain the advantageous performance of dividend-paying companies:

  1. Dividend-paying companies must keep cash on hand: A company’s cash balance is used to payout dividends, so a company must have enough liquid cash to continue to pay out dividends to its shareholders. Granted, dividends are optional, but companies who have a history of paying out dividends are very likely to continue paying dividends to their shareholders.
  2. Dividends require careful investment decisions: Investments require companies to spend cash. Dividend-paying companies will therefore spend more time considering a new investment opportunity, and will avoid riskier investments in favor of those that can quickly generate cash. They will do this to avoid harming the company’s obligations and cash balance, which is a necessity to continue paying out dividends.
  3. Investors will not sell-off dividend-paying companies in bearish markets: Many people who invest in dividend-paying companies are in it for the long-haul, and will continue to reinvest the dividends they receive until retirement. The best dividend-paying companies have a history of continually paying out dividends and increasing their dividend every year. Therefore, even in bearish markets, dividend investors will likely continue to receive dividends, and will perhaps even purchase more of the stock due to lower prices. Ultimately, this leads to less downside risk and better performance.

To reiterate, when a company pays out a dividend, it may be an indication that a company is doing well. If a company’s dividends are consistently growing over time, this is an even better indication that they are doing well and are growing as a company. The best dividend-paying companies are therefore naturally more stable for your investment profile as they will likely continue to pay out dividends, possibly even in poor economic times.

Obviously, there are benefits for companies who pay out dividends. A lot of investors invest in stocks that pay out dividends, especially those that pay out and grow their dividend consistently. Naturally, the stock prices of these companies will rise over time, which is beneficial for both the company and the investor.

Advantage #2: No Manipulation of Numbers

Another reason why you should consider dividend investing is because numbers such as profit, revenue, debt, financial ratios, and more can be manipulated by companies. This leads investors to think that a company is doing well, when in reality, it may not be. Unfortunately, most (if not, all) publicly traded companies do manipulate their numbers in some form or another.

When it comes to dividends, companies cannot lie about dividends. Dividends are real payments that are being paid out to shareholders. Obviously, a company cannot lie about its dividend once it’s in the hands of its shareholders.

Tip #8: Never Ignore Dividend Growth

In your investment research process, one of the first steps you should take after finding a dividend-paying stock, is to check to see whether the dividend the company you’re considering investing in has consistently grown its dividend over time.

Dividend growth is a crucial success indicator. A company that pays out the same dividend amount each year, may be an indication of a company that is not really growing, or dominating more areas of its industry.

A flat dividend should therefore be a huge red flag for a dividend investor, and may signal a future dividend cut.

With dividend growth, investors are more able to reinvest the dividends they receive, to increase the effects of compound interest, and receive higher dividend payments in the future.

Dividend growth = Higher income + Higher stock price

Companies that consistently grow their dividend over time generally experience a rise in the value of their stock price. As you can see with many companies who follow the dividend growth principle, as the dividend increases over time, so will the value of the company. Naturally, more and more people will want to invest in companies that grow their dividend and have a proven business model.

Tip #9: Accept the Unavoidable Poor Dividend Investments

Even if you extensively research every dividend stock you add to your dividend portfolio, as you grow and are forced to choose less-quality dividend stocks, you will likely have multiple dividend stocks that cut or reduce their dividend.

One example of this is Kraft Heinz (KHC), a consumer staple dividend-paying company:

As you can see in the chart below, the company's dividend has flat-lined:

| Stablebread
SeekingAlpha: KHC Dividend History

Obviously, if you purchased this stock a few years prior for its dividend or capital appreciation, it was a poor investment. In fact, KHC was forced to cut its dividend by 36% at the start of 2019 to preserve cash. Regardless, dividend investing is a viable long-term strategy, even if one makes the mistake of investing in a stock like Kraft Heinz.

This is because as a dividend investor you should be diversified correctly, and assuming you own more than a few dividend stocks, one bad investment will not diminish one's overall dividends significantly. Therefore, through diversifying, the winning dividend stocks in your portfolio will compensate for the losers.

You also have to take into consideration that most dividend stocks do not fall as much as Kraft Heinz did, both in stock price and in dividends. Moreover, as a dividend investor you should know when to sell a dividend stock, although not ideal, and this can protect you from further loss as well.

Tip #10: Know Dividend Tax Rates

The last tip I can give you is to know how much you will pay in taxes on the dividends you receive, as this is not the same as capital gains.

See the article above and pay attention to the definitions of qualified and non-qualified dividends.

Note that if you've invested in real estate investment trusts (REITs), then the dividends you receive will be taxed as ordinary income. This is why I do not recommend investing in REITs for beginner dividend investors or small accounts.

The Bottom Line

Companies that choose to pay dividends do so to keep investors interested in their company. This is because they may not have as much growth potential as less mature companies on the stock market.

Therefore, these dividend-paying companies will accept lower amounts of money in return for the potential future benefit that often occurs with large dividend stocks. Lower amounts of money and the importance of making sure there's enough cash also leads to less money being squandered by the company through poor acquisitions, for example.

Moreover, dividend stocks are usually some of the best-performing and stable stocks out there. So, when a blue-chip company does not payout dividends to its shareholders, you should question whether this company has the right values to hoard the large amounts of cash they have.

In the end, remembering these tips and applying them to the dividend investment strategy should provide you with more confidence when you're investing in dividend-paying companies.

Disclaimer: Because the information presented here is based on my own personal opinion, knowledge, and experience, it should not be considered professional finance, investment, or tax advice. The ideas and strategies that I provide should never be used without first assessing your own personal/financial situation, or without consulting a financial and/or tax professional.

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