Once regarded as a haven for retirees or unsophisticated investors, dividend-paying stocks and ETFs have recently roared into
the spotlight as investors of every
orientation search for ways to eke out more immediate income from longer term equity holdings. But judging a stock only by its dividend yield is not necessarily the best way to approach dividend investing. So as an aid to dividend-oriented investors, and with the help of our awesome contributors, I've put together this Dividend Investing Primer which I hope will help readers get the most from their dividend stocks. Why Dividend Stocks? Dividend payments are generally made monthly, quarterly or annually. In uncertain times, generating real and reliable income from their portfolio can be a boon to anyone's budget. More importantly, a healthy assortment of dividend- Seeking Alpha Home | My Portfolio | Breaking News | Latest Articles | StockTalk | ALERTS | PRO Sign in / Join Now
1,318 people decided to get DEM articles by email alert Which cover: new articles | breaking news | earnings results | dividend announcements Get email alerts on DEM Evelyn C. Roth Profile| Send Message| Follow (82) A Dividend Investing Primer Feb. 13, 2011 2:53 AM ET | 15 comments | Includes: AUSE, AXJL, DBU, DEM, DES, DEW, DFE, DFJ, DGS, DHS, DIM, DLN, DLS, DNL, DOL, DON, DRW, DTD, DTH, DVY, DWM, DXJ, GNAT, GULF, HEDJ, IDV by: Evelyn C. Roth
A Dividend Investing Primer [iShares Dow Jones Select Dividend (ETF), iShares Dow Jones ... http://seekingalpha.com/article/252479-a-dividend-investing-primer 1 of 10 5/4/2014 4:27 PM paying stocks can be the backbone for your long-term investment strategy no matter the economic climate, as David Van Knapp notes in Why I Love Dividends. One traditional knock on dividend stocks has been that, "only poorly-managed companies or companies in decline tend to pay dividends," and that successful companies aggressively reinvest profits to spur innovation and growth. Dividend Growth Investor disagrees: He details a variety of reasons why healthy, thriving companies pay dividends, including corporate constraints on internal asset allocation; a company's position within an already mature industry; and the fact that excessive reinvestment doesn't always guarantee successful growth or development. Some people even argue that a company's dividend is a leading indicator for its fiscal health - because it's a gauge of management's optimism around the company's future. Factors to Consider Many novice dividend investors focus primarily on a stock's yield - assuming that higher is always better. "Unfortunately, high yield stocks often carry higher than average risk," Dividends4Life writes. What sort of risks? Look for signals such as: Is the company in a limited growth industry? Is it in a particularly volatile industry? Has it experienced recent financial problems? Has its share price fallen? Do shareholders believe there are financial problems on the horizon? So while yield is clearly a factor to consider, other metrics worth focusing on are included in David Van Knapp's The 4 Qualities of the Best Dividend Stocks: Initial yield - what does the stock yield today? (David's minimum is 2.5%) 1. The reliability of the dividend - does the company have a history of paying and growing dividends? 2. A history of dividend increases - are earnings growing at a clip that will facilitate dividend increases? 3. The stock's growth potential - over and above dividend increases, are you investing in a solid growth stock? 4. Companies with a history of paying and raising dividends for at least 25 years are often called Dividend Aristocrats or Dividend Champions (see: Comparing Dividend Aristocrats to Dividend Champions). Here are five questions Chuck Carnevale asks before investing in a dividend-paying stock: Are dividends growing, and if so, at what rate, how consistently and for how long? 1. Has the company ever cut its dividend, and if so, why? 2. What about the payout ratio - is it reasonable, and is it increasing or decreasing? 3. What has been the cumulative total amount of dividends paid over a given period of time? 4. What has been the nominal yield and yield on cost (growth yield) that the stock has delivered? 5. And a warning from Nicholas Southwick Levis: "Make sure free cash flow covers most or all of the dividend payments made over the past few years." If debt is the A Dividend Investing Primer [iShares Dow Jones Select Dividend (ETF), iShares Dow Jones ... http://seekingalpha.com/article/252479-a-dividend-investing-primer 2 of 10 5/4/2014 4:27 PM primary resource for a company's dividend payments, you're likely looking at a dividend - or even a company - at risk. Maximizing Dividend Returns Don't overlook valuation when choosing dividend stocks. Past, present and future earnings will all have a significant impact on the size and distribution of a company's dividend. Price-to-book ratio can also help you gauge the upside potential of a dividend stock by allowing you to determine which stocks are undervalued. Seasoned dividend investors often look to own a mix of high yielding stocks - for immediate, richer payouts - alongside dividend growth stocks which hold the promise of future lucrative increases. "The dividend growth investment strategy has held up under severe questioning," David Van Knapp, a proponent of this hybrid strategy, writes. Young and novice investors shouldn't shy away from dividend paying stocks either. Kevin Parker, in 5 Tips for Young Investors Looking to Start Investing in Dividend Stocks, highlights the huge upside: ...dividend stocks are a great area to focus on for new and young investors because they tend to be less volatile, provide a slight buffer against loss because of the dividend, and most importantly, because the philosophy of investing in such stocks tend to be a more conservative long-term approach rather than trading for a quick buck. Reinvesting dividends can significantly increase your holdings, not to mention your yield on cost. As noted by David Fish in DRIPS Are for Kids (And All Kinds of Grownups Too), there are hundreds of companies - including such Dividend Champions as Abbott (ABT), PepsiCo (PEP) and Johnson & Johnson (JNJ) - that sponsor Dividend Reinvestment Programs (DRIPS), which saves investors from having to use their brokers and incurring additional fees. More intrepid investors also use options to generate income from both dividend-paying and non-dividend paying stocks in their portfolio. To learn more about generating income using covered calls, the Covered Call Tool has a great tutorial, not to mention a best-of-breed set of tools. Possible Pitfalls There's no guarantee that a company will continue to increase or even pay its dividend. In particularly difficult conditions, companies have been known to freeze or even cut their dividend. Aficionados advocate selling a stock when it cuts its dividend, cautioning that it is often the warning sign of more trouble to come. When a dividend is frozen, it's also time to keep a close eye on the stock. Alternative Dividend Vehicles MLPs or Master Limited Partnerships are similar to dividend stocks, but often boast significantly higher yields. Because of how they're structured, MLPs are limited to certain types of businesses, such as those involving the extraction or transportation of natural resources such as gas, oil and coal. Rather than becoming equity holders, MLP owners become limited partners in the parent company, and receive quarterly required distributions, subject to a different set of tax implications than equity dividends. Another alternative income-generating investment vehicle are REITs - (Real Estate Investment Trusts), which issue trust units rather than shares, and own and manage different types of real estate properties including apartment units, shopping centers and office buildings. Distributions are made quarterly. Because REITs are required by law to 'pass along' or distribute 90% of their income, they don't pay taxes, which makes each unit holder responsible to pay taxes on distributions. A Dividend Investing Primer [iShares Dow Jones Select Dividend (ETF), iShares Dow Jones ... http://seekingalpha.com/article/252479-a-dividend-investing-primer 3 of 10 5/4/2014 4:27 PM Dividend Investing and Retirement A portfolio flush with dividend paying stocks, if smartly managed, can generate reliable income for years. No surprise then that retirees have always been drawn to equities that generate regular income. But a well-plotted, well-planned dividend stock portfolio can be an ace in the hole for any investor, no matter how far off retirement may be, as Dividend Growth Investor describes in The Case for Dividend Investing in Retirement. Dividend stocks, he says, are "a must-own asset class not only for the retired investor who needs income for the next three or four decades, but also for the investor who expects to retire in 30 or 40 years." Once you're in retirement, how much of your portfolio should you allocate to dividend stocks vs. bonds? David Van Knapp shares the way he made the calculation for himself in Asset Allocation For A Dividend Growth Investor. So Now What? To learn more about dividend investing and your portfolio - as well as to join the spirited conversation taking place right now within Seeking Alpha's dividend investing community - start with our Dividend Stock Ideas theme page. There, you'll find a diverse array of informative posts, combined with lively and instructive discussions between contributors and readers in the comments section following each article. Want even more information on Income Investing? See our Investing for Income dashboard. 1,318 people decided to get DEM articles by email alert Get email alerts on DEM Share this article with a colleague Tweet 0 Articles that link to this one 5 Years Until Retirement? What Is Your Plan? by Bob Johnson A Young Investor's DGI Plan And Portfolio by Erik Sorensen Constructing the Core of Your Dividend Growth Portfolio by Bob Johnson Constructing Your 2012 Dividend Growth Portfolio, Dependable Yield With Managed Risk And Volatility by Bob Johnson Dividend Growth Portfolio Core Holdings Performance For 2011 by Bob Johnson More articles by Evelyn C. Roth The Wisdom of (Our) Crowds: Hudson City Bancorp Dividend Cut Sun, Apr 24 Like Like Share Share About this article Emailed to: 22,061 people who get Dividends & Income daily. Tagged: Dividends & Income, Income Investing Strategy Problem with this article? Please tell us. Disagree with this article? Submit your own. A Dividend Investing Primer [iShares Dow Jones Select Dividend (ETF), iShares Dow Jones ... http://seekingalpha.com/article/252479-a-dividend-investing-primer 4 of 10 5/4/2014 4:27 PM Comments (15) Register or Login to rate comments fortypercent , contributor Comments (106)
great piece of work. thanks 13 Feb 2011, 10:59 AMReplyLike4 InvestRite#1 , contributor Comments (79)
Evelyn, looks like I've got some work cut out for me, thanks for the obvious time in putting this all together for this generous community. 10 Jul 2012, 08:05 AMReplyLike0 David Fish , contributor Comments (7103)
This is a great primer for the increasing number of people interested in dividend growth investing. I hope it will be part of an ongoing set of tools to help those people. 16 Mar 2011, 07:48 PMReplyLike4 Robert Allan Schwartz , contributor Comments (12041)
Many congratulations to David Van Knapp, Dividend Growth Investor, Chuck Carnevale, Dividends4Life, and David Fish!
May this article bring your wisdom to many more SA readers! 24 Mar 2011, 05:45 PMReplyLike3 A Dividend Investing Primer [iShares Dow Jones Select Dividend (ETF), iShares Dow Jones ... http://seekingalpha.com/article/252479-a-dividend-investing-primer 5 of 10 5/4/2014 4:27 PM easyrob , contributor Comments (281)
Good work Evelyn.....good work 2 Apr 2011, 01:17 PMReplyLike2 Norman Tweed , contributor Comments (7199)
Thanks Evelyn for a great primer for prospective dividend investors. You point the reader in the right direction. I just heard about this paper today, and think you should feature it on the front page. 2 Apr 2011, 03:46 PMReplyLike3 mostserene1 , contributor Comments (3322)
Thank you Ms. Roth, for this excellent primer, which I will recommend to some potential investor friends who could gain from this lucid explanation.
As a long-time dividend investor, I began to worry once dividend investing "became cool" and mainstream people like Suze Orman began recommending dividend investing. The herd is generally wrong when it comes to the stock market, and it looks like the herd is taking a fancy to dividend investing.
But other than driving up the price of stocks, I'm not sure what damage the herd can do the the philosophy, moreover, I'm not convinced the Average Joe has the discipline to buy the right stocks at the right time. Guess only time will tell.
Anyway, knowledge is a good thing, and SA is a valuable resource. Thanks again for this article and for the dashboard grouping for Income Investors. 19 Apr 2011, 02:24 PMReplyLike4 David Fish , contributor A Dividend Investing Primer [iShares Dow Jones Select Dividend (ETF), iShares Dow Jones ... http://seekingalpha.com/article/252479-a-dividend-investing-primer 6 of 10 5/4/2014 4:27 PM Comments (7103)
Concerning DRIPs for Canadians, I found a very good site: www.dripprimer.ca/cana...
Note that most Canadian DRIPs are not available to U.S. citizens, so this link is primarily for Canadian readers. 22 Apr 2011, 07:48 AMReplyLike3 retailinvestor , contributor Comments (822)
To be fair, there should also be a link that provides all the arguments that DETRACT from the common arguments pro-dividends. www.retailinvestor.org... 2 Jul 2011, 11:12 AMReplyLike1 Amateur investor , contributor Comments (764)
Great article Evelyn. Great notes and alternatives. I also own MLP's and am very happy with their performance. Thank you 14 Jul 2011, 10:11 PMReplyLike1 Berninvestor , contributor Comments (772)
Wonderful article Evelyn Roth! I don't know how I missed it because I try to read most articles on SA about dividend investing. Thank you. 27 Jul 2011, 01:27 PMReplyLike4 dutchog , contributor Comments (2)
A Dividend Investing Primer [iShares Dow Jones Select Dividend (ETF), iShares Dow Jones ... http://seekingalpha.com/article/252479-a-dividend-investing-primer 7 of 10 5/4/2014 4:27 PM this type of informative article is truly a pleasure to review and especially helpful for guiding and instructing those newer to the financial world. Keep up the excellent work ! 7 Jul 2012, 04:42 PMReplyLike1 mstone , contributor Comments (20)
Ms. Roth, An excellent article.. Thank you so much. We need more wonderful people like you. Hope to see your next article... Thanks again..
Michael W. Stone 12 Sep 2012, 12:37 AMReplyLike0 Robert Allan Schwartz , contributor Comments (12041)
Michael, Evelyn is no longer with Seeking Alpha, but there are many other excellent authors who write about dividend growth investing. May I suggest, to start with, folks like David Van Knapp, David Fish, and David Crosetti? There are many others, but that is a good place to begin.
Excellent useful information. 2 May 2013, 12:26 PMReplyLike0 A Dividend Investing Primer [iShares Dow Jones Select Dividend (ETF), iShares Dow Jones ... http://seekingalpha.com/article/252479-a-dividend-investing-primer 8 of 10 5/4/2014 4:27 PM Guest Add Your Comment: Publish Loading... Symbols: Authors: Top Ideas ADRs Of Allied Irish Banks Worth Just $1.19; Will Drop To That Level Within 7 Months by Night Heron 1. Automodular Corporation: A Special Situation Decoupled From Market Volatility by Alec Mazo 2. Spartan Energy May Double: Stellar Management Track Record, Cheap Valuation, And Production Outperformance by Josh Young 3. Tesco's Price Drop Offers Excellent Value by Saj Karsan 4. Dividends & Income Dividend Growth Investing And The Benefits Of Being Patient by The Part-time Investor 1. The Effect Of Dividends On Stock Prices: Is There A Connection? by David Crosetti 2. Weekly Intelligence For MLP Investors by MLPData 3. Undervalued High-Dividend Stock Will Grow Its Dividend By More Than 45% In 2014 by Double Dividend Stocks 4. Kinder Morgan Energy Partners: Structure Isn't Anti-Investor by Seeking Profits 5. ETFs & Portfolio Strategy The Illusion Of Control by Investing 501 1. The Time To Hedge Is Now! Do It For Less - Part IV by Mark Bern 2. Nuveen To Consolidate Its Equity Option Income Funds: What Does It Mean? by Left Banker 3. Buy In May And Tap Dance Away by Wade Slome 4. The (Still Relatively) Sustainable Portfolio: Moving Up The Learning Curve by T Rail Investor 5. A Dividend Investing Primer [iShares Dow Jones Select Dividend (ETF), iShares Dow Jones ... http://seekingalpha.com/article/252479-a-dividend-investing-primer 9 of 10 5/4/2014 4:27 PM Macro View GLD: A Very Dangerous Set Up by Avi Gilburt 1. Sprott's Rick Rule: 'We Are Going To Default' by James P. Montes 2. Where Is The Market Headed Now? Leveraged ETFs Tell The Story by Peter F. Way 3. What Does The Low Market Volatility Mean? by John M. Mason 4. One New Reason To Ignore The BLS Jobs Report by Steven Hansen 5. TOP AUTHORS: The Opinion Leaders TOP USERS: StockTalkers | Instablogs Mobile Apps | RSS Feeds | Sitemap | About Us | Contact Us Terms of Use | Privacy | Xignite quote data | 2014 Seeking Alpha A Dividend Investing Primer [iShares Dow Jones Select Dividend (ETF), iShares Dow Jones ... http://seekingalpha.com/article/252479-a-dividend-investing-primer 10 of 10 5/4/2014 4:27 PM