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
- Diversify across sectors
- Focus on dividend growth over yield
- Reinvest dividends (DRIP)
- Check payout ratio and FCF
- Hold for long term