Investing in Dividend Paying Stocks – Tips on Getting Started
If you are interested in investing in dividend paying stocks, you need to realize that there is no, one “perfect” dividend stock for everyone. All investors are different, so your choice of a good stock may be different from someone else’s. It depends on which characteristics make a particular stock, and which of the characteristics you define as being valuable and important.
Still, the majority of investors consider initial yield, dividend growth, consistency, and potential to be four very important aspects of a stock. The initial yield should be reasonable, although how so is up to you. If you are completely new to investing in dividend paying stocks, then you should probably not go lower than 2% for the initial yield. As you learn more, you can adjust that percentage somewhat, but for now, remain with 2%.
Safety and Consistency
Reliability is also very important. Not only is it crucial in paying the dividend, but in growth as well. As it is impossible to know the future, the best we can do is compare the past and present to see if there is any consistency. If the past performances were good and the current condition is overall promising, then you may safely invest in the dividend paying stock.
When looking over a company, you can determine whether or not it is worth investing in dividend paying stocks, if it displays:
Sustainable and adequate payout ratio that it directs to its dividends.
Uninterrupted payment into dividends for at least five years.
No current or recent severe financial problems that threaten a dividend.
A steady history of increasing its dividends over the years.
A statement from management itself that it is determined to pay—and raise—the dividend.
When researching a stock company, make sure to take all of these factors into consideration.
Growth of a dividend
Another thing to investigate when determining whether or not investing in dividend paying stocks is worth your money and time, is the growth of the dividend. The growth represents the company’s ability to maintain and pay into its dividends while keeping them separate from other investments such as bonds.
Each investor has his or her own benchmark as to what minimum growth rate is acceptable, although 4%-5% seems to be about average. Set your minimum benchmark around those values. Keep in mind that some companies increase their dividends regularly while others do so irregularly.
Depending on the circumstances, either can be the best choice. Sometimes the companies that increase dividends irregularly end up increasing them a lot more in the long run, while those who increase dividends regularly may not necessarily raise them that much. Thus, you need to do the math when investing in dividend paying stocks.
Potential for price appreciation
The three aforementioned factors focus on the dividends themselves. Price appreciation potential focuses on the price appreciation of a dividend stock. Deposits and bonds are fixed income investments, whereas dividend paying stocks are not. A stock, however, has a chance to exceed inflation, which means you can potentially profit, a great deal more by investing in dividend paying stocks rather than bonds or CD’s.