As part of your overall wealth management process, whether you prefer a local brokerage investor or online stock trading yourself, Weblori dividend growth investing will help explain many terms related to investors focused on income growth through dividend paying stocks.
What is Dividend Growth Investing?
"Dividend growth investing is an active management style that focuses on stocks with a long history of dividend increases. The objective is to produce a steadily increasing income stream that is immune to market fluctuations."
What is a Dividend Growth Investor?
A Dividend Growth Investor (DGI) can be defined as an entity that invests in the purchases of stock (equities) or mutual funds that pay a dividend back to the investor.
For the focus of this website, the entity I am referring to would be either an individual investor or a group of investors who pool their financial resources together and invest as a team or partnership.
Why Do Companies Pay Dividends?
You may have noticed that some companies pay dividends and other do not. What is the benefit to the company to pay money back to a stockholder? Here are a few:
1. The company is mature and does not need the extra money to re-invest in itself for growth, like research and development or buying real-estate for more office space.
2. To attract more investors to purchase their stock. This is how they raise funds, as oppose to not paying the dividend and keeping the money for future use.
3. Paying dividends back to investors is a sign that the company is financially healthy, which gives them a better standing on the stock market.
Why Should We Focus on Dividends?
What is the purpose or goal to focusing on dividend paying stocks as opposed to regular stocks that do not pay dividends, or pay just small amounts? Companies that do not pay dividends tend to earn value with the growth of their stock price over time.
So why shouldn't we just buy stocks that are financially sounds and who have good potential to increase in value over time? Dividend growth investing offers other benefits.
The attractions for DGI entities can be these:
1. Instant gratification. We see immediate results from our investments, monthly or quarterly, and can re-invest those dividend funds into purchasing more stock shares.
2. Easier to liquidate than selling the stock shares. If you need cash, you can withdraw the non invested money from your brokerage account cash balance without affecting your number of shares.
This example shows that you have a choice of how to access your money should you need it, without upsetting the balance of your portfolio.
3. Steady income stream. Some investors like to have an additional steady stream of income to add to their existing portfolio, whether in retirement or non-retirement accounts.
4. The actual annual yield returned to the investor tends to be higher than average compared to a non-dividend paying company stock.
What About the Risk?
As with all investments, including precious metals, there is the element of risk of losing your money. Some people try to reduce or offset the risk by investing in dividend paying mutual funds.
These funds are managed funds so they have management fees, which lower you actual return.
That said, these funds are a collection of stocks from different companies. The basic assumption is that if one company files for bankruptcy or has legal issues, only a small percentage of the fund assets are affected.
However when the whole sector that the fund stocks belong to has bad news the entire fund is affected. Sectors like utilities or real estate seem to go through cycles.
You should always check the fund or individual stock history to get a better understanding of the cycles and help you determine when to buy.
Higher Yield Categories, Just to Name a Few:
You can use free online stock screeners, like finviz to help you look for stock or funds that meet you investing requirements. There are some things to know:
1. The United States has two Major stock exchanges: NASDAQ and NYSE.
2. There are two main Indexes to use to compare the funds with: Standard and Poor (S&P 500) and the Dow Jones Averages.
3. There are nine sectors: Basic materials, Conglomerates, Consumer Goods, Financial, Healthcare, Industrial Goods, Services, Technology, and Utilities.
4. For each of the Sectors listed in the previous item, are multiple industries.
The importance associated with knowing the nine sectors is to determine which sectors include high yield dividend paying stocks or funds, then purchasing some from several sectors to further diversify your portfolio in the hopes to help reduce your risk even more.
1. To invest in Business Development Companies (BDC's); the sector is Financial and Industry is Credit Services.
2. To invest in Real Estate Investment Trusts (REITs); the sector is Financial and the Industry is REIT.
3. To invest in Private Equity Capital Management Firms, the sector is Financial; the Industry is Asset Management.
4. To invest in Telecoms, the sector is Technology; and the Industry is Telecom Services.
5. To invest in Oil and Gas, the sector is Basic Materials; the Industry is Independent Oil & Gas
6. To invest in Utilities, the sector is Utilities; the Industry is Electric, Gas, or Water.
For Stock trades -
to reduce your total cost of ownership for your assets, you can manage your own brokerage trades online.
Online trade fees are much lower than traditional brokerage fees - trades made by a live person cost more.
There are several online brokerage accounts to choose from.
The online sites offer training for new investors that you will want to take advantage of.
My favorite for low cost fees for Stock trades and the ability to also SELL/BUY options contracts is Tastyworks.
One last Financial Sector Industry are Exchange Traded Funds (ETFs). These are a newer investment vehicle which offer potential for dividend earnings.