The Complete Guide to Dividend Investing

Investing in dividend stocks can be a great way to build wealth. A dividend stock is a stock that pays a dividend to its shareholders, typically in the form of cash payments. The amount of the dividend is usually based on the company's earnings and profits and is paid out periodically, typically quarterly, monthly, or semi-annually.

There are two types of dividends: regular and special. Regular dividends are paid out to investors on a quarterly basis, while special dividends can be paid out at any time and usually have higher payout rates. Regular dividends provide a steady income stream, while special dividends can be used as an investment strategy to take advantage of market volatility.

Why You Should Invest in Stocks That Pay a Dividend

Investing in dividend stocks is a great way to generate passive income. Dividend stocks are often more stable and less volatile than other asset classes, like bonds. The advantage of investing in dividend stocks is that you can earn money from the dividends as well as from the capital growth of the stock.

There are many benefits of investing in dividend stocks, but one of the most important ones is that you can generate passive income.

How to Start Investing in Dividend Stocks?

There are many ways for investors to find stocks with good returns and consistent income. Here are the four key things to look for when researching a dividend stock:

1. Dividend Payment

The first statistic to consider is the dividend itself, i.e. how much it pays per year and its dividend yield, which can be found on Yahoo! Finance. One way to decide if the dividend yield is good is to compare it with the average market or compare it with competitors so that you get a feel for how good the stock’s number is.

Below is an example of a dividend (3M) that has a nice yield when compared to the average market yield.

2. Payout Ratio

This shows the proportion of earnings a company pays in the form of dividends and how much it reinvests in the business. Generally, you want to see a business that has a decent payout ratio and still invests in the future growth instead of paying it out as dividends.

We can see from our example that 3M has a payout ratio of 61.71%. This means that for every share of earnings, 61.71% is paid out as a dividend, and the remaining 39.29% is reinvested into the business.

3. Company’s earnings over the past

The valuation of a company is determined by the value of its assets. For a business to be successful, it needs to generate earnings that are trending upwards. When earnings are trending upwards, the business is making more money than before.

Generally, you want earnings to be trending upwards.

4. dividend history

Another important factor to look at when researching the company is the company’s dividend history to see if they have a reliable past of paying dividends consistently or if are they a bit more inconsistent. Dividend history is a crucial metric that investors must take into account when assessing a company.

To view dividend history, we can use a website like Macro Trends. We should look for a company with a consistent, upward-trending dividend history, even during recessions.

Continuing the previous example of 3M, the following is their dividend history for the last twenty years:

They boast a strong dividend history, with payouts steadily increasing over time. This is why they are known as one of the "dividend aristocrats".

Conclusion

Investing in dividend stocks can be a great way to generate passive income and build wealth, as they are typically more stable and less volatile than other asset classes. When researching a dividend stock, investors should consider the dividend payment, payout ratio, company's earnings over the past, and dividend history.