What is Dividend Investing?

So, you’re wondering “what is dividend investing?”

Just know before we even get started that I’m a little in love with you now. Because dividend investing is my jam.

Dividend investing is like planting a money tree that drops tasty cash fruit every so often.

It’s a strategy that focuses on buying stocks of companies that pay dividends—those sweet little cash payments that come from the company’s profits.

Let’s dive into the world of dividend investing!

When you invest in dividend-paying stocks, you’re aiming to build a portfolio that generates a steady income stream from the dividends, while also enjoying potential capital appreciation as the stock price grows over time.

Why Dividend Investing?

Here’s what makes dividend investing so appealing:

Regular income:

Companies pay dividend income to shareholders automatically every month, quarter, or year depending on their dividend policy.

The dividends you receive can be used to supplement your income, reinvest in more stocks, or fund your next big adventure.

Stability:

Dividend-paying companies are often well-established and financially stable, which can make them less volatile than growth-oriented stocks.

Passive growth:

Reinvesting dividends can lead to compounding growth over time, as you buy more shares that, in turn, generate more dividends. It’s like a snowball effect of money goodness!

Inflation protection:

Some companies increase their dividend payments over time, helping to offset the impact of inflation on your investment.

Keep in mind that dividend investing isn’t without risks.

Stock prices can fluctuate, and companies can reduce or eliminate their dividends.

It’s essential to do your homework and pick solid companies with a history of stable, growing dividend payments.

Here are the metrics to know about dividend investing.

How Do Dividends Work

There are a few metrics you need to know about dividend investing. In a nutshell, you’re looking for a decent yield, low payout ratio, consistent dividend growth, and diversification.

Dividend yield:

This is the amount of money an investor receives in dividends each year, expressed as a percentage of the stock’s price.

For example, if a stock is trading for $100 a share and has a dividend yield of 3%, an investor who buys one share would receive $3 in dividends each year.

Dividend payout ratio:

This is the percentage of a company’s earnings (just a fancy term for profits) that are paid out in dividends.

For example, if a company has a payout ratio of 50%, it means that half of its earnings are paid out to shareholders in the form of dividends.

Dividend growth:

This is the rate at which a company’s dividends increase over time.

A company that has a history of consistently increasing its dividends is often seen as a good investment because it indicates that the company is financially strong and has a stable source of income.

The Infinite Income retirement investment strategy that I use and teach is a dividend growth strategy.

Take a look at this real-life example of Prudential Financial’s stock dividend summary.

You can see that if we were to buy a share of Prudential Financial (PRU) we’d lock in a dividend yield of 6.08%. That’s because the annual dividend per share is $5.00 and the share price when this was taken was $78.02.

So, $78.02 / $5.00 = 6.08%.

They are paying out 50.74% of their earnings and the dividend has grown an average of 9.01% over the last 5 years!

Diversification:

It’s important for investors to diversify their portfolio by investing in a variety of companies that pay dividends.

This can help reduce risk and provide a steady stream of income.

In a nutshell, dividend investing is all about creating a portfolio that generates consistent income from dividend-paying stocks while still having the potential for capital appreciation.

It’s a popular strategy for investors looking for a more passive and stable approach to growing their wealth.

Happy dividend hunting! 🌳💰