Dividends and Income Investing

Dividend investing provides regular income while potentially growing your capital.

What are Dividends?

Definition

• Cash payments from company to shareholders
• Typically paid quarterly
• Expressed as yield (annual dividend / price)
• Sign of company profitability

Dividend Yield

• Formula: Annual Dividend / Stock Price
• Example: $4 dividend on $100 stock = 4% yield
• Compare to savings account rates
• Higher yield is not always better

Types of Dividend Stocks

Dividend Aristocrats

• Increased dividends 25+ consecutive years
• Most reliable dividend growers
• Examples: JNJ, PG, KO, MMM
• Lower yield but consistent growth

High-Yield Stocks

• Yield above 4%
• May include REITs, utilities
• Higher income but more risk
• Verify sustainability

Dividend Growth Stocks

• Lower current yield
• Rapidly growing dividends
• Better total returns over time
• Tech companies starting dividends

Key Dates

Declaration Date

• Company announces dividend

Ex-Dividend Date

• Must own before this date
• Stock typically drops by dividend amount

Payment Date

• When dividend is paid

Evaluating Dividend Safety

Payout Ratio

• Dividends / Earnings
• Below 60% is generally safe
• Above 80% may be unsustainable
• Below 30% = room to grow

Free Cash Flow Coverage

• FCF must cover dividends
• More important than earnings
• Growing FCF = safer dividend

Building Dividend Portfolio

1. Diversify across sectors
2. Focus on dividend growth over yield
3. Reinvest dividends (DRIP)
4. Check payout ratio and FCF
5. Hold for long term