Dividend investing involves buying and holding stocks that pay dividends, with the goal of generating income and potentially benefiting from capital appreciation over the long-term. Dividends are payments made by a company to its shareholders, typically in the form of cash or additional shares of stock.
There are many different reasons why people invest in dividend-paying stocks, including the potential for a steady stream of income, the opportunity to benefit from capital appreciation over the long-term, and the potential for dividends to serve as a hedge against inflation. Dividend-paying stocks may also be attractive to investors who are in a high tax bracket, as dividends are typically taxed at a lower rate than other types of income.
However, it is important to note that dividend-paying stocks carry their own set of risks, including the possibility of fluctuations in the stock price, the risk that the company may not continue to pay dividends, and the risk that the value of the dividends may not keep pace with inflation. It is important for investors to understand these risks and to be prepared for the possibility of losses as well as gains.
Dividend Investing: An Overview
Types of Dividend-Paying Stocks
There are many different types of dividend-paying stocks, including blue-chip stocks, utility stocks, and REITs.
Blue-chip stocks are stocks of well-established, financially sound companies with a track record of stability and growth. These types of stocks are often considered to be lower risk and may offer a steady stream of dividends. Examples of blue-chip stocks include large multinational corporations like IBM, Johnson & Johnson, and Procter & Gamble.
Utility stocks are stocks of companies that provide essential services, such as electricity, gas, and water. These companies tend to have stable earnings and may offer a steady stream of dividends. Examples of utility stocks include utility companies like Duke Energy and Consolidated Edison.
REITs (Real Estate Investment Trusts) are companies that own and operate income-generating real estate properties, such as office buildings, apartment complexes, and shopping centers. REITs are required to pay out at least 90% of their taxable income as dividends to shareholders, making them a potentially attractive option for investors seeking regular income.
How to Invest in Dividend-Paying Stocks
There are many different ways to invest in dividend-paying stocks, including buying individual stocks, investing in mutual funds or exchange-traded funds (ETFs) that hold a diversified portfolio of dividend-paying stocks, and participating in a workplace retirement plan like a 401(k) or pension plan.
If you are considering investing in individual dividend-paying stocks, it is important to do your research and thoroughly evaluate the company before making a purchase. This may include reviewing the company’s financial statements, understanding its business model and competitive advantage, and considering the management team and their track record. It is also a good idea to diversify your portfolio by owning a variety of different dividend-paying stocks rather than putting all your eggs in one basket.
Mutual funds and ETFs offer the opportunity to invest in a diversified portfolio of dividend-paying stocks without the need to individually research and purchase individual stocks. These types of investment vehicles are managed by professional fund managers who research and select the underlying holdings in the fund. However, it is important to be aware of the fees associated with mutual funds and ETFs, as these can eat into your returns.
Dividend Investing Strategies
There many dividend investing strategies, just to name a few:
- Dividend Growth Investing: This strategy involves investing in companies that have a history of consistently increasing their dividends over time. These companies are considered to be financially stable and have a strong business model that allows them to generate steady cash flow.
- Dividend Income Investing: This strategy involves investing in companies that currently offer high dividend yields. These companies may not have a history of consistently increasing their dividends, but they offer investors a high return on their investment in the form of dividends.
- Dividend Aristocrat Investing: This strategy involves investing in companies that have a history of consistently increasing their dividends for at least 25 consecutive years. These companies are considered to be financially stable, have a strong business model, and are able to generate steady cash flow. This is often considered as a low-risk investment strategy.
- Dividend Capture: This strategy involves buying shares of a stock just before it pays its dividend, and then selling the stock shortly after. This allows investors to collect the dividend without having to hold the stock for a long period of time.
- High-Yield Dividend Investing: This strategy involves investing in companies that currently offer high dividend yields, but also have a history of financial stability. These companies may have a higher risk than other dividend stocks, but they also offer the potential for higher returns.
- Value Dividend Investing: This strategy involves investing in companies that are undervalued by the market, but also have a history of paying dividends. These companies may be overlooked by other investors, but they offer the potential for high returns if the market eventually recognizes their true value.
- Diversified Dividend Investing: This strategy involves investing in a diversified portfolio of dividend-paying stocks from different sectors and industries to minimize risk and maximize returns.
- International Dividend Investing: This strategy involves investing in companies that are based outside of the United States and pay dividends in a foreign currency. This can provide diversification benefits and the opportunity to benefit from currency fluctuations.
The first 3 are probably the most common and we’ll detail them a bit further.
Dividend Growth Investing
Dividend Growth Investing is a strategy that involves investing in companies that have a history of consistently increasing their dividends over time. These companies are considered to be financially stable and have a strong business model that allows them to generate steady cash flow.
To go about Dividend Growth Investing, you can follow these steps:
- Research: Start by researching companies that have a history of consistently increasing their dividends. You can find this information on financial websites such as Yahoo Finance or Google Finance, or you can use a stock screener to filter for companies with a strong dividend growth history.
- Evaluate the company: Once you have a list of potential companies, evaluate each one to determine if it is a good investment opportunity. Look at the company’s financials, management, and industry trends to determine if it is financially stable and has a strong business model.
- Calculate the Dividend Growth Rate: Look at the company’s dividend history and calculate its dividend growth rate, which is the rate at which the company has increased its dividends over time. A higher dividend growth rate indicates a stronger commitment to increasing dividends in the future.
- Look at the company’s payout ratio: The payout ratio is the percentage of earnings paid out as dividends. A company with a low payout ratio has more room to increase its dividends in the future.
- Evaluate the yield: Look at the company’s current dividend yield, which is the annual dividend per share divided by the current stock price. A higher yield is generally better, but also consider the company’s dividend growth rate and payout ratio when evaluating the yield.
- Diversify: Diversify your portfolio by investing in different companies and sectors to minimize risk and maximize returns.
- Monitor and Rebalance: Monitor your investments regularly and rebalance your portfolio as needed. If a company’s dividends begin to stagnate, it may be time to sell and invest in a different company with a stronger dividend growth history.
Please note that this is just a general guideline and it’s important to do your own research and consult with a financial advisor before making any investment decisions.
Dividend Income Investing
Dividend Income Investing is a strategy that involves investing in companies that currently offer high dividend yields. These companies may not have a history of consistently increasing their dividends, but they offer investors a high return on their investment in the form of dividends.
To go about Dividend Income Investing, you can follow these steps:
- Research: Start by researching companies that currently offer high dividend yields. You can find this information on financial websites such as Yahoo Finance or Google Finance, or you can use a stock screener to filter for companies with high dividend yields.
- Evaluate the company: Once you have a list of potential companies, evaluate each one to determine if it is a good investment opportunity. Look at the company’s financials, management, and industry trends to determine if it is financially stable and has a strong business model.
- Look at the company’s dividend history: While companies with high yields may not have a history of consistently increasing their dividends, it is still important to look at their past dividend payments to get an idea of the company’s commitment to paying dividends in the future.
- Look at the company’s payout ratio: The payout ratio is the percentage of earnings paid out as dividends. A company with a low payout ratio has more room to maintain or even increase dividends in the future.
- Evaluate the yield: Look at the company’s current dividend yield, which is the annual dividend per share divided by the current stock price. A higher yield is generally better, but also consider the company’s dividend history, payout ratio and the overall stability of the company when evaluating the yield.
- Diversify: Diversify your portfolio by investing in different companies and sectors to minimize risk and maximize returns.
- Monitor and Rebalance: Monitor your investments regularly and rebalance your portfolio as needed. If a company’s dividends begin to decline, it may be time to sell and invest in a different company with a higher yield.
Please note that this is just a general guideline and it’s important to do your own research and consult with a financial advisor before making any investment decisions. Additionally, companies with high dividends yields may come with a higher risk, as the company may be facing some financial difficulties or the yield may be high because the stock price has dropped.
Dividend Aristocrats
Dividend aristocrats are companies that have consistently increased their dividends for 25 or more consecutive years. These companies are often seen as stable and financially sound, with a track record of growing their dividends over the long-term.
Dividend aristocrats are typically blue-chip stocks of well-established companies with a strong financial foundation. They may include multinational corporations, utility companies, and other types of businesses that have a history of stability and growth.
Investing in dividend aristocrats can be a way for investors to generate a steady stream of income and potentially benefit from capital appreciation over the long-term. These stocks may be attractive to income-oriented investors, particularly those who are seeking a more conservative investment option.
It is important to note that dividend aristocrats are not without risk. The value of the stock and the dividends paid by the company may fluctuate, and there is no guarantee that the company will continue to increase its dividends in the future. As with any investment, it is important to thoroughly research and carefully consider any dividend aristocrat before making a decision.
There are currently around 60 companies in the S&P 500 index that are considered dividend aristocrats, meaning they have consistently increased their dividends for 25 or more consecutive years.
The number of dividend aristocrats may fluctuate over time as companies are added or removed from the list based on their dividend payment history. Companies may be removed from the list if they fail to meet the criteria for consecutive dividend increases, or if they are acquired or go out of business.
It is important to note that the dividend aristocrats list is based on the S&P 500 index, which represents the performance of 500 large publicly traded companies listed on the New York Stock Exchange and the NASDAQ. There may be other dividend-paying companies that meet the criteria for being a dividend aristocrat but are not included on the list because they are not part of the S&P 500 index.
Here are the dividend aristocrats companies in 2022:
| Company | Sector | Years of Dividend Growth | Dividend Yield (as of Feb. 9) |
| 3M Co. (MMM) | Industrials | 64 | 3.70% |
| A.O. Smith Corp. (AOS) | Industrials | 29 | 1.50% |
| Abbott Laboratories (ABT) | Health care | 50 | 1.50% |
| AbbVie Inc. (ABBV) | Health care | 50 | 4.50% |
| Aflac Inc. (AFL) | Financials | 39 | 2.50% |
| Air Products and Chemicals Inc. (APD) | Materials | 40 | 2.60% |
| Albemarle Corp. (ALB) | Materials | 28 | 0.70% |
| Amcor PLC (AMCR) | Materials | 39 | 4.20% |
| Archer-Daniels-Midland Co. (ADM) | Consumer staples | 48 | 2.10% |
| Atmos Energy Corp. (ATO) | Utilities | 35 | 2.60% |
| Automatic Data Processing Inc. (ADP) | Information technology | 47 | 2.00% |
| Becton, Dickinson & Co. (BDX) | Health care | 50 | 1.30% |
| Brown & Brown Inc. (BRO) | Financials | 28 | 0.60% |
| Brown-Forman Corp. (BF-B) | Consumer staples | 38 | 1.10% |
| Cardinal Health Inc. (CAH) | Health care | 35 | 3.60% |
| Caterpillar Inc. (CAT) | Industrials | 28 | 2.20% |
| Chevron Corp. (CVX) | Energy | 35 | 4.10% |
| Chubb Ltd. (CB) | Financials | 29 | 1.60% |
| Church & Dwight Co. Inc. (CHD) | Consumer staples | 26 | 1.00% |
| Cincinnati Financial Corp. (CINF) | Financials | 62 | 2.20% |
| Cintas Corp. (CTAS) | Industrials | 38 | 1.00% |
| The Clorox Co. (CLX) | Consumer staples | 46 | 3.20% |
| The Coca-Cola Co. (KO) | Consumer staples | 60 | 2.70% |
| Colgate-Palmolive Co. (CL) | Consumer staples | 60 | 2.20% |
| Consolidated Edison Inc. (ED) | Utilities | 48 | 3.70% |
| Dover Corp. (DOV) | Industrials | 66 | 1.20% |
| Ecolab Inc. (ECL) | Materials | 30 | 1.10% |
| Emerson Electric Co. (EMR) | Industrials | 60 | 2.10% |
| Essex Property Trust Inc. (ESS) | Real estate | 28 | 2.70% |
| Expeditors International of Washington Inc. (EXPD) | Industrials | 28 | 1.10% |
| ExxonMobil Corp. (XOM) | Energy | 38 | 4.30% |
| Federal Realty Investment Trust (FRT) | Real estate | 50 | 3.50% |
| Franklin Resources Inc. (BEN) | Financials | 41 | 3.70% |
| General Dynamics Corp. (GD) | Industrials | 31 | 2.20% |
| Genuine Parts Co. (GPC) | Consumer discretionary | 66 | 2.50% |
| Hormel Foods Corp. (HRL) | Consumer staples | 56 | 2.20% |
| Illinois Tool Works Inc. (ITW) | Industrials | 51 | 2.20% |
| International Business Machines Corp. (IBM) | Information technology | 26 | 4.80% |
| Johnson & Johnson (JNJ) | Health care | 60 | 2.50% |
| Kimberly-Clark Corp. (KMB) | Consumer staples | 49 | 3.50% |
| Linde PLC (LIN) | Materials | 29 | 1.40% |
| Lowe’s Cos. Inc. (LOW) | Consumer discretionary | 48 | 1.40% |
| McCormick & Co. (MKC) | Consumer staples | 36 | 1.40% |
| McDonald’s Corp. (MCD) | Consumer discretionary | 45 | 2.10% |
| Medtronic PLC (MDT) | Health care | 44 | 2.50% |
| NextEra Energy Inc. (NEE) | Utilities | 26 | 2.00% |
| Nucor Corp. (NUE) | Materials | 49 | 1.70% |
| Pentair PLC (PNR) | Industrials | 45 | 1.40% |
| People’s United Financial Inc. (PBCT) | Financials | 29 | 3.40% |
| PepsiCo Inc. (PEP) | Consumer staples | 49 | 2.50% |
| PPG Industries Inc. (PPG) | Materials | 50 | 1.50% |
| Procter & Gamble Co. (PG) | Consumer staples | 66 | 2.20% |
| Realty Income Corp. (O) | Real estate | 27 | 4.40% |
| Roper Technologies Inc. (ROP) | Industrials | 29 | 0.60% |
| S&P Global Inc. (SPGI) | Financials | 49 | 0.80% |
| Sherwin-Williams Co. (SHW) | Materials | 43 | 0.80% |
| Stanley Black & Decker Inc. (SWK) | Industrials | 54 | 1.90% |
| Sysco Corp. (SYY) | Consumer staples | 42 | 2.30% |
| T. Rowe Price Group Inc. (TROW) | Financials | 36 | 2.90% |
| Target Corp. (TGT) | Consumer discretionary | 50 | 1.70% |
| VF Corp. (VFC) | Consumer discretionary | 50 | 3.20% |
| W.W. Grainger Inc. (GWW) | Industrials | 51 | 1.30% |
| Walgreens Boots Alliance Inc. (WBA) | Consumer staples | 46 | 3.80% |
| Walmart Inc. (WMT) | Consumer staples | 49 | 1.60% |
| West Pharmaceutical Services Inc. (WST) | Health care | 29 | 0.20% |