Contemplating a foray into dividend investing? Consider the following before dipping your toes into the dividend pool.
1. Dividends are one tool for accumulating wealth
Yes, dividends are an excellent income growth tool. However, so is stock price appreciation. I sold my Starbucks (NASDAQ: SBUX) shares years ago when the stock price was $24. As of this writing, Starbucks shares are $75.01.
At the time I sold, Starbucks was not paying a dividend and I decided to focus on dividend-paying companies. I should have been more patient. If I had held on and sold now, I would have made significant income, as the company now pays a dividend. Recently, Starbucks declared a quarterly dividend of $0.26 per share, or $1.04 annualized. Its yield is 1.4%.
Your stock return is dividend yield plus share price growth. The Starbucks example above is a good current example of stock return.
2. Look at dividend history
Canadian Utilities’ (TSX: CU) annual dividend per share has increased for 42 consecutive years. The company recently declared a Q2 2014 dividend of $0.2675 per Class A non-voting share and Class B common share. This is a 10% increase over the $0.2425 cents paid in each of the four quarters of 2013. Its current dividend yield is 2.70%, with a five-year average dividend yield of the same. Its dividend rate is $1.07.
3. Understand that dividends are a safety net against share price fluctuation
If you own shares in a quality dividend-paying company with excellent growth potential, dividends should continue to flow into your trading account despite share price volatility. The key is patience and not getting spooked when share prices drop. The reward is watching the money roll in monthly or quarterly.
4. It’s not always about monster yields
John Heinzl, a dividend investor for Globe Investor’s Strategy Lab said last week, “Many investors make the mistake of looking at the high yield alone, which can set them up for disappointment if the company hits a pothole and has to cut its dividend.” He further said, “I play it safe by sticking with modest yields in the range of 2% to 5%. But I’m not averse to owning higher-yielding stocks in my personal portfolio — if I’m confident the payouts can be sustained.”
Royal Bank of Canada (TSX: RY)(NYSE: RY) has a dividend yield of 3.8%. I’m quite certain it will continue to offer steady dividend payments and regular dividend increases for years to come. I’m happy with its modest yield and what it brings into my trading account.
5. Be a dividend diversifier
This is simple enough, as many like to diversify their portfolios in general. Make sure your dividend stocks are spread across a variety of sectors. If one sector languishes and dividends are cut, you have the other sectors as insurance.
Consider the above points and do your research before making investments in dividend-paying companies. I’m a dividend investor myself and seek to stay consistently updated on important dividend news.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.