Money Milestones
What I’m Learning About Dividend Investing
When it comes to investing, the end goal is almost always the same: make money. However, the paths you take to get there can vary. One such option that’s really grabbed my attention as of late is dividend investing.
For some investors, dividends may just be an afterthought while, for others, they’re the main attraction. In my case, receiving my first dividend from my first share of stock (The Walt Disney Company) was an oddly satisfying moment that made me want more. With that in mind, I wanted to share some of what I’ve discovered and learned about dividend investing in recent months, including some options I’m actively trying out.
The Dividend Investing Basics
What is dividend investing?
The basic idea behind dividend investing is to buy assets that regularly pay out dividends (hence the name). Of course, this definition begs the question “what is a dividend?” Simply put, a dividend is a payment companies make to shareholders using their profits. Typically, these payments are made quarterly.
Since not every company regularly pays dividends — and some don’t pay them at all — dividend investors seek out stocks that have a good track record in this aspect. Naturally, this comes with some downsides as, traditionally, the companies that offer the best dividends are also those with less upside in stock price.
Perhaps my favorite explanation of dividends and dividend investing comes from Time in the Market whose extended metaphor post tiled My Dividend Employee Steve really drives home the point. Therefore, if you’re looking for a little more insight on the topic, I’d definitely recommend checking it out.
Looking at yields
One way to judge the potential of a so-called dividend stock is to look at its yield. According to Investopedia, dividend yield is expressed as a percentage highlighting how much a company pays out in dividends relative to its stock price. This figure can typically be found on platforms such as Robinhood, SoFi Invest, or even Google.
Although this isn’t a surefire way to identify good dividend investment candidates, it is one factor. On that note, now is also a good time to mention that these figures are based on past data and aren’t a guarantee for the future. In fact, due to the economic upheaval the coronavirus pandemic has incited, we’ve seen several companies either suspending or lowering their dividends. For this and so many other reasons, always be sure to do your research when investing and don’t invest money you don’t have.
A really interesting extrapolation of dividend yield comes from Young Adult Money’s David Carlson who calculated how much you’d need to invest in various stocks in order to get a (hypothetical) $1,000 a year in dividends. Yes, keep in mind that this is $1,000 a year, so don’t get temporarily excited like I did and think that you can turn $15,000 into a $1,000 a month — d’oh! My stupidity aside, it’s a great look at how these yield figures actually translate in to cash.
Reinvestment vs. distribution
It’s interesting to note that the way individual investors approach dividends can differ depending on where they are in their lives. Speaking generally, this can be boiled down to whether they are in growth mode or passive income mode. These modes will then likely dictate what investors do with their dividends: take them as a distribution or reinvest them.
For younger investors like myself who are looking to grow their portfolio, the latter strategy likely makes more sense. That said, these reinvestments can be done with the long term goal of eventually using such dividends to supplement your income in retirement (early or traditional). To that point, you can think of dividends as little quarterly boosts that are helping push you that much closer to your financial goals.
What’s nice is that several trading platforms offer automated dividend reinvestment options — sometimes also called DRIP. In fact, the ever-popular Robinhood recently introduced the feature to users. Using their version of DRIP, you can select which of your stock automatically reinvest their dividends, although those that don’t support fractional shares are ineligible. For long-term investors, this is a great way to (as the great Mr. Popeil would say) set it and forget it.
You can learn more about the Robinhood DRIP service in my video:
Based on the number of shares, not the time you’ve held them
Finally, something else I want to point out may perhaps only apply to me, but here it goes. Unlike savings accounts where the interest you earn is not only dictated by your balance at the end of the month but also by how much money you had during that month, dividends are paid out based purely on the number of shares you own at the time that the dividend is declared. Therefore, as long as you buy before the cut-off date, you get the dividend. Again, this may seem completely obvious to most but it’s something I had to wrap my head around moving from the world of high-yield savings into investing. By the way, this matter of timing is something that will come up as we look at a few dividend plays I’ve been trying out.
3 Dividend Investments I’m Exploring
The Aristocrats
When it comes to dividend investing, it seems a solid starting place is The Aristocrats. No, not the Penn Jillette documentary about comedians telling the world dirty jokes — but dividend stocks that have long track records of paying out to shareholders, aka The Artistocrats. Specifically, aristocrats are defined as stocks that have increased their base dividends every year for at least 25 years. They must also be included in the famed S&P 500 index and meet a couple of other less noteworthy requirements According to The Motley Fool, there are currently 66 companies that meet these criteria.
Like with your traditional dividend stocks, there are trade offs to investing in these aristocrats. For example, as that Motley Fool article points out, an index of these aristocrats ($NOBL) has underperformed the overall S&P 500. That’s partially because of the 25-year requirement for aristocrat status, which excludes a number of tech brands (not that all of them pay dividends anyway). Still, if you’re just looking for an easy way to get started with dividend investing, this could be one path.
Preferred shares ETFs
When I recently read (and reviewed) the book Quit Like a Millionaire, authors Kristy Shen and Bryce Leung introduced me to a type of investment I didn’t know existed: preferred shares ETFs. While I had heard the term “preferred shares” before, I wasn’t really sure how to invest in them — or considered that there might be an ETF comprised of them. Basically, what makes preferred shares an interesting investment play is that they are higher in the pecking order than common stock when it comes to paying out dividends.
After reading the book, I decided to experiment by buying half a share (yeah, I really like to start small) of iShares Preferred and Income Securities ETF ($PFF). Sure enough, less than two weeks later, I received my first dividend. It was for a dime… but still!
Given this experience, I’d definitely consider buying more shares of $PFF or similar ETFs as I build out my portfolio. Of course, given the current circumstances, it may not be worth putting too much stock (no pun intended) into the results I see over the next few months. Luckily, I’m a long-term investor with plenty of time to spare.
REITs
Another potential source of dividend payments is REITs. What is a REIT, you ask? Well, it stands for real estate investment trust. As that implies, by buying shares of REITs, you’re indirectly investing in housing, commercial buildings, and other developments.
Once again, in a bid to experiment a bit, I decided to buy $20 of $VNQ — Vanguard Real Estate ETF. Unforunately, in an opposite scenario from my $PFF experience, I managed to make this purchase just a couple of days after the dividend announcement. Thus, I’ll need to wait until next quarter before I see a payout. On the bright side, the ETF price has risen since I bought it, so that’s good.
By the way, a similar option to REITs I’ve seen over and over again is the site Fundrise. This platform actually offers what they call eREITs, which are made up of different products. Unlike some real estate crowdfunding sites, Fundrise doesn’t require you to be an accredited investor (if you don’t know what that is, chances are you aren’t one), making it a possibility for me. That said, at this time, I’d rather focus on other options — but I wanted to mention it since I do find it interesting.
Even as someone who’s still fairly green when it comes to investing, I’ve come to learn just how much I love dividends. Therefore, it’s only natural that I’ve recently taken a great interest in learning about dividend investing and the different options that come with such a strategy. Of course, the key to investing is diversification, which I’m trying to observe by dipping my toe into a few different waters. But, as I learn more about what I like, what I don’t, and what’s working for me, I’ll be sure to share.
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Interested with investing but I need to learn more, thanks for the added information.
This is another good way to invest where it can provide you with regular passive income.
Thanks for the info of how dividend investing works.