My Other Dividend Investing Tips
Dividend Reference posted a great collection of dividend investing tips. As mentioned in my previous post, one of my tips was featured as tip #38.
I’ve posted my other 11 tips below:
Tip #1: Invest consistently. Live on less than you make each month so that you have money available to invest. All the research shows that the best time to invest is yesterday and the next best time is now. Don’t let worrying about the day-to-day market fluctuations paralyze you from taking that first step into the market. The time your money is working for you is the key.
Tip #2: Have fun. Don’t worry about the TV analysts that talk doom and gloom…they are there to get the most views. Instead, read financial books, follow your favorite investing blogs and websites, and talk to your friends about investing. As you begin to collect those dividends, you’ll look forward to spending that investing money. It’s like walking through your favorite store but instead of losing that money buying a depreciating asset you actually get paid instead. Investing shouldn’t be a chore but rather something to look forward to.
Tip #3: Keep a spreadsheet. It allows you to see at a glance how much money you can invest each month. Simply have a column with income and a column with expenses. Hopefully the difference is a net positive value. Then take the majority of that difference and spend it buying your favorite companies. A spreadsheet is also very motivational. As you invest consistently and keep track of the monthly dividends, you’ll soon see the dividend amounts start to snowball. That’s the power of your regular contributions combined with a company’s dividend increases. It’s an amazing feeling to see that number continually increase with little work on your part.
Tip #4: Invest in what you know and already use. If you shop at Target, consider buying its stock. If you love Coca Cola, look into owning a small portion of it. It is fun to know that a tiny (albeit very tiny) portion of what you just spent will be returned to you in the form of dividends. I find myself preferentially choosing products made by the companies I own.
Tip #5: Decide what your goal is in terms of dividends. Are you looking for current income or future income? While some people may set a minimum dividend yield as part of their criteria, others may look more towards dividend growth. A company like Visa pays under 0.7% today, which is definitely not enough to live on. However, over enough time and given consistent dividend increases, a small yielding company like that could provide terrific yield in the future. I’ve been invested in Visa since June 2013 and am earning nearly 1.1% on my initial investment. The reason is that Visa has been increasing its dividend by 33% per year over the last 5 years.
Tip #6: Real Estate Investment Trusts (REITs) are a great investment to own in a dividend portfolio. They typically are on the higher yielding end. Some, like the popular Realty Income, pay monthly dividends, which are great because it allows even quicker monthly compounding. However, given their tax structure they do not pay qualified dividends. This means that if they are held outside of a tax-advantaged account, taxes will be owed at your income tax rate, not at the much nicer long-term capital gains tax rate. Therefore, consider placing your REITs in your IRA or other tax-advantaged account.
Tip #7: Don’t limit yourself to stocks just found on a screener. By this I mean keep an eye out for companies that may not quite meet the criteria of 10 years of dividend increases (or whatever criteria you pick) but may be well on their way there. While there’s no magic formula that tells specifically how a dividend paying company will continue to do in the future, there are criteria to keep in mind. One is that companies that raise their dividend tend to continue to do so in the future. These companies are generally well run with cash flow that allows the dividend to be supported. Look at such things as the dividend payout ratio to see if the dividends are safe.
Tip #8: Acquaint yourself with Dave Fish’s list of Dividend Champions on dripinvesting.org. This excellent resource lists all the stocks that have continually raised their dividends. It can provide an excellent base to start a dividend paying portfolio.
Tip #9: A good formula to know is called the Chowder Rule. This looks for a combination of current yield plus 5-year dividend growth. According to that formula, you want to find a stock that through a combination of dividend growth and current yield has a score of greater than 12 for a 3+% yielding stock to greater than 15, if the stock yields less than 3%. Visa is an example of a company that some people would not have on their radar since it yields less than 0.7%. However, its 5-year dividend growth of 33% gives it a Chowder score of 33.7, an excellent choice for the dividend growth investor.
Tip #10: While dividend paying stocks are great, you don’t need to completely limit yourself to them. If you don’t need the income now, a high total return coming from an appreciating share price can be equally as rewarding. If dividends are needed in the future, then you can just sell the stock and move that money into a dividend paying asset. Another possibility is to purchase a growth stock that you bet will ultimately pay a dividend. An example of a company that fit that criteria was Apple, now a reliable dividend payer. Another company that I bet will be an excellent dividend growth stock at some point is Berkshire-Hathaway. Why not get in now?
Tip #11: Once settled into the dividend investing routine, consider creating supplemental income through options. These can be a reliable and safe way to take a stock that generally only pays dividends quarterly and instead create an asset that brings in income every 30-45 days. You can do this easily through selling covered calls on the stocks that you already own at least 100 shares. You can also get paid to buy dividend paying stocks at a price you pick through a process of selling puts. A great place to learn about options trading is by watching the educational videos at tastytrade.com.