Best Dividend Investing Strategies for 2021
A dividend strategy is a strategy that can give you some potential profit. Buying dividend stocks is a great way to earn some extra profit. Stocks that pay out dividends are usually less risky, but still, if you don’t know what you are doing dividend stocks can be very risky.
Investors are always looking for the best dividend investing strategy that will generate a steady income through stock dividend payments and to build up their portfolios. Also, it is important to know that there are different dividend strategies for those who want to invest.
What are dividend stocks and how often do dividend stocks pay you money?
Dividend stock is the piece of a company’s earnings that they pay out to their shareholders. Usually, these are well-known companies with a clean record of distributing a small portion of their earnings to the shareholders. These distributions are called dividends and can be payout in two forms: cash or stock.
Dividends are seeing as a reward to its shareholders for investing their money in the company’s equity. Although the major profit that a company is making is kept in the company, a small portion of the earnings is distributed to the shareholders as a dividend. It is important to note that dividends earnings are tax-free.
Companies pay out dividends on a regular basis: monthly, quarterly, or annually. Usually, the company will announce upfront when the dividend will be paid. The amount of dividend payment and the payout rate is determined by the company’s board of directors.
The safety of your dividends payouts is measured with the dividend payout ratio. Investors often look for payout ratios that are 80% or less. If the payout ratio is good sometimes investors reinvest their money to buy even more shares of the company. This process is called the DRIP – dividend reinvesting plan.
But the choice is yours. You can also decide to buy stocks at a different company, save the money, or spend them.
Another benefit of stocks that pay out dividends is that you would receive money even if the stock price goes up or down. Of course, you should have in mind that this only applies as long as the company distributes them.
Advantages and disadvantages of dividend stocks?
Here are the pros and cons if you are interested in investing in dividend stocks that can help you to make a decision. We have summed up five advantages and five disadvantages that can help you create the best dividend investing strategy when it comes to investing in dividend stocks.
Advantages of buying dividends stocks
- Passive dividends income stream – you receive money that you can reinvest, spend, or save it.
- Solid total investment return – often, with time the price of dividend stock will rise
- Dividend reinvestment for compounding returns – reinvesting is a nice strategy you can take advantage of compounding returns
- Hedge against inflation – dividend stocks are offset inflation and will protect the purchasing power of your money in case of an inflation
- Preferential tax treatment – dividend stocks are tax-free
Disadvantages of buying dividend stocks
- Tax inefficiency
- Investment risk – investing in dividend stocks comes with higher risk when compared to some other investment that can generate income like deposits, bonds, or saving accounts
- Sector concentration – when investing in dividends you must pay attention to dividend stock portfolio construction
- Dividend policy changes – dividend policy changes by the company board can be very damaging for you as an investor
- Investment research and knowledge – learn more about the cons of finding dividends stocks, analyzing dividend stocks, constructing a dividend portfolio, monitoring dividend stocks
How to choose the right dividend stock?
When it comes to choosing the right dividend stock is important to know which companies offer dividends that increase every year. This is a great way for you to protect your assets from inflation. Stock that pays dividends is a great passive income that will grow with time.
Well-established and bigger companies have a higher chance of paying dividends. This is because they have a smaller need to reinvest money in their company and they want their shareholders to be satisfied. Usually, these companies are banks, financial institutions, pharmaceuticals, healthcare facilities, utilities, and oil and gas companies.
Startups and companies who are on rising tend to invest all their profits into growing and expanding. This is the reason why they are not offering dividends payments.
So to summarize before buying dividend stocks these are some things you should have in mind:
- Find a dividend-paying stock
- Evaluate the stock
- Decide how much stock you want to buy
Best long-term dividend stocks
The best dividend investing strategy in order to build your wealth is to buy dividend stocks that grow in time, are stable, and pay regular dividends in time. These are the 10 companies to buy dividend stocks from and to hold them forever:
- American States Water – a company that provides water and wastewater serves to the US military
- PPG Industries – the number 2 company in the world for paint and coatings
- Parker-Hannifin – the biggest company in the world for motion and control technologies
- Johnson & Johnson – a healthcare company that generates over $1 billion every year in sales
- Lowe’s – big player in the home-improvement industry in the US
- Procter & Gamble – consumer products manufacturer with an enormous portfolio of products
- Coca-Cola – the giant for beverages
- Microsoft – one of the largest companies in the world
- Apple – tech giant with an extremely rapid growth
- Verizon – company for wireless communications and high-speed internet solutions responsible for the development of 5G
Other excellent companies who pay regular dividends that you need to consider are PepsiCo, Realty Income (great real estate investment trust), Target (a company that sells products that people need), Welltower (another great real estate investment trust), Cardinal health (company for healthcare services and products), ABM industries incorporated (provides facility solutions in the US), Air products and chemicals, Inc., Raytheon technologies corporation (aerospace and defense company), The Clorox company.
These are just some of the companies that have a great payout ratio for paying dividends. There are a lot more companies with excellent price and payout ratios. So make research and choose wisely where to invest your money.