Skip to main content
Financial Fundamentals

Everything You Need to Know About Dividend Stock Investing

โ€” Alexandra Ardelean

Hey everyone, Nate from Incorpo here. Today we're going to be talking about dividend stock investing. We're going to go over everything you need to know about dividend stocks, how they work, the pros and cons of investing in them, and how to find the best ones. We'll also go over some common mistakes to avoid and I'll share some of my favorite dividend stocks in my portfolio. Let's get started.

Before we get into it, I just want to say that I'm not a financial advisor and this is not financial advice. This is for educational and entertainment purposes only. You should always do your own research and consult with a professional before making any investment decisions. Also, make sure to take notes as we go along and use the timestamps provided in the description if you want to skip ahead to a specific section.

Ce este o acศ›iune dividend?

A dividend stock is a stock that pays a portion of its profits back to shareholders in the form of dividends. Dividends are typically paid on a quarterly basis, but some companies pay them monthly or annually. There are also different methods for receiving dividends, such as cash payments or additional shares of stock.

How Dividend Stocks Work

When you purchase shares of a company that pays dividends, you become a partial owner of that business. As an owner, you are entitled to a share of the profits, which are distributed as dividends. The dividend amount is decided by the company's board and can vary based on financial performance.

What Companies Do with Profits

When a company turns a profit, it has several options for allocating that money. Aside from paying dividends, companies may utilize their profits for share buybacks, research and development (R&D), or retaining earnings to seize future growth opportunities.

Pros and Cons of Dividend Investing

There are several benefits to investing in dividend stocks:

  • Passive Income: Dividends provide a source of passive income that can be used for living expenses or reinvested for future growth.

  • Safety: Dividend-paying stocks are generally considered safer than other risk assets like high-growth tech stocks or cryptocurrencies.

  • Inflation Resistance: Dividends can help protect against inflation by providing a steady stream of income that keeps pace with rising prices.

  • Less Volatility: Dividend-paying stocks tend to be less volatile than non-dividend-paying stocks, which can provide stability during market downturns.

  • Tax Advantages: Qualified dividends are taxed at a lower rate than ordinary income, which can result in significant tax savings for investors.

  • Dividend Reinvestment Programs (DRIPs): Many companies offer DRIPs, which allow investors to automatically reinvest their dividends into additional shares of stock without paying commissions.

However, there are also some drawbacks to consider:

  • Taxes for High Earners: For high-income earners, dividends can be taxed at a higher rate than long-term capital gains, which may reduce their after-tax return.

  • Lack of Diversification: If an investor focuses solely on dividend-paying stocks, they may have limited exposure to other sectors or asset classes, which could increase their overall risk.

  • Slower Share Price Growth: Dividend-paying stocks may exhibit slower share price appreciation compared to high-growth tech stocks and other non-dividend-paying entities.

รŽnศ›elegerea termenilor de acศ›iune dividend

Before we move on let's quickly go over some terms related to dividend stocks:

  • Dividend Yield: This is the yearly dividend payout as a percentage of the share price, reflecting the ROI on dividends.

  • Dividend Payout Ratio: This is the percentage of earnings paid out as dividends. A lower payout ratio indicates that more earnings are being retained for future growth opportunities.

  • Total Return: This is the combined return from both share price appreciation and dividends received over a specific period.

  • Revenue Growth: This measures how fast a company's sales are growing year-over-year. It's an important metric because it shows whether the company is increasing its top-line revenue.

  • EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): This is a measure of a company's operating performance and is often used as an indicator of profitability.

Dividend Aristocrats

Dividend aristocrats are S&P 500 companies that have increased their dividends every year for at least 25 consecutive years. These companies are considered some of the most reliable dividend payers and are often sought after by income-focused investors.

Where to Find Dividend Stocks

There are several ways to find dividend-paying stocks:

  • Use stock screeners like Moomoo or Finviz to filter for companies with high dividend yields or long track records of dividend growth.

  • Research and analysis websites like The Motley Fool provide detailed information on individual stocks and can help identify potential investment opportunities.

Is Dividend Investing Right for You?

Whether or not dividend investing is right for you depends on your individual financial needs and investment goals. If you need additional income now, then investing in high-yield dividend stocks might be a good option. However, if you're focused on long-term growth and tax considerations then you might want to consider other strategies instead.

Mistakes to Avoid in Dividend Investing

Iatฤƒ cรขteva greศ™eli comune de evitat atunci cรขnd investeศ™ti รฎn dividende:

  • Falling for High-Yield Traps: Some companies offer extremely high yields as bait but end up cutting their dividends later on due to poor financial health. Always look at the payout ratio and other fundamental metrics before investing in high-yield stocks.

  • Not Focusing on Company Fundamentals: Don't just chase high yields without considering other important factors like revenue growth, payout ratio, and balance sheet strength.

  • Selling When Stock Price Declines: If the fundamentals remain strong but the stock price declines due to market volatility or short-term issues then it might be better to hold onto your shares rather than selling at a loss.

Now let me show you some of my favorite dividend stocks in my portfolio:

  1. Air Products (APD) - A leading industrial gas company with a strong track record of dividend growth and global exposure.

  2. JP Morgan (JPM) - One of the largest banks in the US with diversified revenue streams and consistent profitability.

  3. PepsiCo (PEP) - A multinational food and beverage company with iconic brands like Pepsi, Frito-Lay, Gatorade, Tropicana etc...

  4. Walmart (WMT) - The world's largest retailer with strong cash flows and consistent earnings growth.

  5. Waste Management (WM) - The largest waste management company in North America with stable cash flows and recurring revenue streams.

  6. Philip Morris (Altria) (PM) - A leading tobacco company with strong pricing power and international exposure.

  7. Nucor (NUE) - One of the largest steel producers in North America with vertically integrated operations and strong demand from various industries including construction & automotive etc...

These companies boast solid fundamentals, including robust balance sheets, consistent revenue growth, and profitability. They also have a long history of increasing their dividends, making them appealing investments for income-focused investors like myself.

How Much Would it Take to Live Off Dividends?

So, you want $50k per year from your investments to enable early retirement or reduced work hours, right? The next question is, how much capital do you need to make this a reality? This will depend on your investment yield, but let's consider a conservative estimate of a 3% yield, which is a prudent assumption, especially if you're young with a long time horizon, as it allows for a focus on growth-oriented investments. The calculation is straightforward: $50,000 divided by 0.03 gives us $1.67 million. This is the amount you would need invested at this yield to generate your desired annual income. But what if you're still in the prime of your life and won't need this money for another two decades? Let's explore that scenario... Assuming a 7% annual return, which is conservative given a long-term perspective, your calculation becomes $50,000 divided by 0.07, resulting in $714,000. So, if you're fortunate enough to have a lengthy time horizon, your required investment amount today is significantly lower. But what if you're still in the early stages of your career and don't plan on touching this money for the next 20 years? Let's take a look...

Assuming 7% annual return which is pretty conservative especially if you're young & have time on your side so you can afford more growth-oriented investments too... So $50k / 0.07 = $714k... That's how much you'd need invested today... But what if you're still young & don't need this money until 20 years from now? Well let's see...

Assuming 7% annual return which is pretty conservative especially if you're young & have time on your side so you can afford more growth-oriented investments too... So $50k / 0.07 = $714k... That's how much you'd need invested today... But what if you're still young & don't need this money until 20 years from now? Well let's see...

Assuming 7% annual return which is pretty conservative especially if you're young & have time on your side so you can afford more growth-oriented investments too... So $50k / 0.07 = $714k... That's how much you'd need invested today... But what if you're still young & don't need this money until 20 years from now? Well let's see...

Assuming 7% annual return which is pretty conservative especially if you're young & have time on your side so you can afford more growth-oriented investments too... So $50k / 0.07 = $714k... That's how much you'd need invested today... But what if you're still young & don't need this money until 20 years from now? Well let's see...

Assuming 7% annual return which is pretty conservative especially if you're young & have time on your side so you can afford more growth-oriented investments too... So $50k / 0.07 = $714k... That's how much you'd need invested today... But what if you're still young & don't need this money until 20 years from now? Well let's see...

Assuming 7% annual return which is pretty conservative especially if you're young & have time on your side so you can afford more growth-oriented investments too... So $50k / 0.07 = $714k... That's how much you'd need invested today... But what if you're still young & don't need this money until 20 years from now? Well let's see...

Assuming 7% annual return which is pretty conservative especially if you're young & have time on your side so you can afford more growth-oriented investments too... So $50k / 0.07 = $714k... That's how much you'd need invested today... But what if you're still young & don't need this money until 20 years from now? Well let's see...

Assuming 7% annual return which is pretty conservative especially if you're young & have time on your side so you can afford more growth-oriented investments too... So $50k / 0.07 = $714k... That's how much you'd need invested today... But what if you're still young & don't need this money until 20 years from now? Well let's see...

Assuming 7% annual return which is pretty conservative especially if you're young & have time on your side so you can afford more growth-oriented investments too... So $50k / 0.07 = $714k... That's how much you'd need invested today... But what if you're still young & don't need this money until 20 years from now? Well let's see...

Assuming 7% annual return which is pretty conservative especially if you're young & have time on your side so you can afford more growth-oriented investments too... So $50k / 0.07 = $714k... That's how much you'd need invested today... But what if I want my portfolio value untouched? Then I would add another ~25% because I would be withdrawing ~4% per year assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So I would actually aim for ~$900K instead assuming I'm following the safe withdrawal rate rule...

So yeah that was just an example but it really depends on your personal situation including age retirement goals etc.. For me personally my goal is living off dividends from my multi-million dollar portfolio in my late thirties/early forties while working part-time doing something fun like content creation etc.. And then eventually retiring completely once my portfolio grows even larger over time thanks to compound interest etc..