How To Invest In Dividend Stocks In 2020

Dividend stocks share a lot of similarities with traditional (non-dividend) equities. As such, many of the same evaluation methods used to determine a good stock can also be applied to dividend stocks, with a few exceptions. Most notably, investors will want to pay special considerations to the stock’s dividend yield. The dividend yield will determine the income one can expect over a year. However, the dividend yield is only a fraction of the equation. In addition to income potential, investors should also look closely at the following:

  • Consistency: Great dividend stocks have developed a track record of growing their dividends year after year. Growing a dividend, whether it be in times of prosperity or downturn, is a sign of strength investors should pay close attention to. The Dividend Aristocrats, for example, have grown their own dividends for at least 25 consecutive years. Conversely, companies who have eliminated their dividends on more than one occasion may not be on solid financial ground, and may not be the best place to deploy money for long periods.

  • Financial Stability: Financial stability is second to none. For a dividend stock to even be considered by investors, it should have a good balance sheet. A company with little debt and a lot of extra cash on hand is always a good sign. Remember, there’s no reason for investing in a dividend stock that won’t be around next year, so put your money where you can set it and forget it.

  • Profit Margins: Dividends are paid directly to shareholders from the companies themselves. As a result, it’s important to make sure the company is making enough to continue paying said dividends. Of course, company revenue can vary from quarter to quarter, but it’s important to make sure the business can keep its shareholders happy.

  • The Moat A moat is another term for a company’s competitive advantage. Investors will want to see their dividend stocks boast a large moat, one that can keep risk to a minimum. A company who doesn’t face a lot of exterior threats is more likely to succeed in the long run and pay dividends for years to come.

  • Potential: Generally speaking, investors invest in dividend stocks for the yield, but there’s no reason a great stock can’t grow too. The best dividend stocks are those which have a lot of growth potential in a promising industry and still pay dividends.

High Yield Vs. Low Yield Dividend Stocks

It is all too easy for inexperienced investors to allocate their cash into dividend stocks with the highest yields. High yields should suggest the investor will get more in return for their investment. However, a high yielding dividend stock isn’t necessarily indicative of a good investment. Dividend stocks with yields much higher than their counterparts are most likely too good to be true. According to Jason Hall at the Motley Fool, “High yields can be the result of a stock that’s fallen because the dividend is at risk of being cut. That’s a dividend yield trap.”

A high dividend yield doesn’t mean the stock is a bad investment, but be wary when something seems too good to be true. Instead of blindly buying a stock for its yield, simply do the homework. Let decisions be based on the company’s fundamentals and track record and not subjective feelings. A good company with a lower dividend yield will almost always trump a virtually unknown entity with a high yield. “It’s better to buy a dividend stock with a lower yield that’s rock-solid than to chase a high yield that may prove illusory,” according to Hall.

How To Invest In Dividend Stocks

With perhaps the lowest barrier of entry for any investment vehicle, investing in stocks for beginners is relatively easy. A brokerage, a mind for due diligence, and a little patience are all that’s needed for dividend stock investing. It can be broken down into five simple steps:

View single page >> |

Disclaimer: The information contained herein was pulled from third party sites. Although this information was found from sources believed to be reliable, FortuneBuilders Inc. makes no ...

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.