“ Do you know the only thing that gives me pleasure? It’s to see my dividend investing coming in”
John D. Rockefeller
Investors who want to fill their portfolios with stocks that regularly pay cash back are known as income, or dividend investors. Dividend investors use stocks as a regular income stream, generally paid quarterly. It’s a popular strategy among retirees who want their investments to generate regular money and stock pickers who prefer large, stable companies
What are Dividends?
Dividends are payments that companies make to their shareholders. When a company makes a profit, the Board of Directors votes on how much of that profit should be distributed to investors, either as cash or as more stock. Companies usually schedule when dividends will be distributed, but additional dividends can be announced anytime.
There’s no guarantee that a company will pay a dividend or what amount it might be. But there are companies with long histories of regular payouts to shareholders.
The Dividend Yield
A dividend is valued through something called a yield, which is the annual dividend divided by the price per share. It is expressed as a percentage. This is useful as it makes it possible for investors to compare dividend payouts between companies.
If Company A pays an annual dividend of $ .50 a share and the price of each share is $20, the dividend yield is calculated as:
$ .50 divided by $20. = .025 or 2.5 percent.
Many income investors look for stocks with a dividend yield higher than the interest yield on U.S. Treasury Bonds. You can see a company’s dividend yield on the Wall Street Survivor quote page.
The Dividend Payout
Income investors also pay attention to the dividend payout ratio, or how much of the profit is paid out in dividends. While income investors like a high dividend payout, if more than 50 percent of the profits are going to shareholders, they worry that not enough money is being reinvested into the future growth of the company. It is the job of a company’s executive and board members to determine the proper balance.
Why be an Income Investor?
For most of the 20th century, investors felt that companies were obligated to pay out dividends. They felt, as owners of the business, they were entitled to at least some of the profits. In today’s reality, investors understand the value of reinvested earnings and don’t necessarily require dividend payments.
But for income investors the stocks of choice are the ones that provide regular dividends that increase over time and guarantee that checks are arriving, or that the dividends themselves are being reinvested into additional shares of stock. Income investors search for the highest income possibilities with the lowest risk.
Lastly, some things to look out for
In addition to a dividend payout ratio of 50 percent or less, these are some of the other traits of companies attractive to income investors.
- The stock has an annual dividend yield between 3 and 6 percent
- The company has generated positive earnings with no losses for at least three consecutive years
- The company has a proven track record of increasing dividends
- The company has a high return on equity, with little or no debt.
Next: Swing Trading