Dividend Investing: 5 Important Things to Consider

Here are five things you need to know about dividend investing before you start.

| More on:
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

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.

Fool contributor Michael Ugulini owns shares in Royal Bank of Canada. David Gardner owns shares of Starbucks. Tom Gardner owns shares of Starbucks. The Motley Fool owns shares of Starbucks.

More on Investing

A small flower grows out of a concrete crack.
Investing

3 Top Stocks You Can Still Buy for Under $20 a Share

Canopy Growth stock (TSX:WEED)(NASDAQ:CGC) and these two others are incredible investments to consider as we continue to move out of…

Read more »

Automated vehicles
Tech Stocks

Want to Be a Millionaire? This 1 Canadian Stock Could Soon See a Blistering Rally

If you can take the risk of buying falling shares of some companies with a solid growth outlook, they could…

Read more »

Oil pipes in an oil field
Energy Stocks

3 Top Stocks for Commodity Exposure

Top stocks like Teck Resources have been hit lately, but most commodity markets remain strong and ready for the next…

Read more »

Happy couple being attended by office worker at office
Dividend Stocks

BCE Stock: A Great Pick to Boost Your RRSP Retirement Fund

BCE (TSX:BCE)(NYSE:BCE) stock is a dirt-cheap telecom stock with a huge dividend yield to keep RRSP investors happy.

Read more »

Money growing in soil , Business success concept.
Dividend Stocks

Want Easy Passive Income? These 2 Canadian Dividend Aristocrats Deliver

Passive income stars like Slate Grocery REIT (TSX:SGR.U) should be on your watch list.

Read more »

stock data
Stocks for Beginners

Are You Starting a Stock Portfolio? If Yes, Keep It Safe and Simple

First-time investors should keep their stock portfolios safe and simple by holding time-tested, income-producing assets.

Read more »

Simple life style relaxation with Asian working business woman healthy lifestyle take it easy resting in comfort hotel or home living room having free time with peace of mind and self health balance
Stocks for Beginners

New Investors: Follow the KISS Model With These 3 TSX Stocks

These TSX stocks keep it super simple for new investors. You'll need each of these services over the next decade…

Read more »

stock research, analyze data
Dividend Stocks

RRSP Investors: 1 Cheap TSX Dividend Stock to Buy Now and Own for 35 Years

RRSP investors can still find top TSX dividend stocks to buy at discounted prices.

Read more »