Dividend investing offers two significant benefits for investors. One, it brings a stable stream of income. Two, it also contributes to the growth of the investors’ portfolio’s market value. Thus, many investors are investing in the dividend. However, there are several guide to dividend investing if you want to gain those two rewards over time.
Seek for safety
A good investor will always have the tendency to seek for dividend safety. The safety is measured by the dividend coverage ratio.
For the general rule, dividend investors usually do not like more than 60% of the company’s profit paid out for the dividends. For instance, if a company gains $150 million, then it is safe if it pays a $50 million dividends. That way the company still has enough money for the management.
It is bad if the company pays $135 million since the management will not have anything left when one day the profit fell by 10%.
Besides that ratio, you have to also consider the company a stable income and cash flow. The higher payout ratio dividend can still be a good investment if the company has more stable money.
That way, the money can cover the dividend when the profit fell.
Also read: Buy the Winning Stock for Your Portfolio
Choose a strategy based on your portfolio
There are two strategies dividend investors usually use, high dividend yield and high dividend growth rate. Both of the strategies will benefit investors with different portfolios.
The high dividend yield strategy can bring cash directly. It usually comes from a slow-growing company with significant cash flow for the payment of the dividend.
On the other hand, a high dividend growth rate strategy requires investors to buy lower-paying dividend stocks. Yet, this company will grow exponentially in the next five or 10 years. Thus, this dividend stock will pay a higher sum of cash in the future.
Now, look at your portfolio and plan before you decide the strategy.
Look for qualified dividend
Find the dividends which are labeled as qualified dividends. They are the stocks that held for a long period of time, usually 60 days or more. This dividend will bring you lower dividend tax rates.
Buying dividend stocks to sell it quickly will make you pay your regular tax rate on your dividend income. Thus, a lesser tax means higher income for you.