Boot Camp Day 3
In September, we did a week-long bootcamp program highlighting a few key topics (like position sizing, timing, and handling corrections). That program can be found here. We’re revisiting that concept, except this time with some different topics.
Today, we’re talking about income investing with Dividends.
Income investors have different goals when it comes to investing. For most, that means dividends.
That said, not all dividends are created equally.
Many of investors’ favorite tech stocks may pay a dividend, but it’s paltry compared to a number of other stocks known for their yields. Conversely, many classic income stocks — like real estate, utilities, or consumer staples — might be starved for growth and innovation.
Some investors try to find something in between, looking for a stock that has a decent dividend yield and decent growth expectations.
For the nitty-gritty on dividend investing, explore this part of the eToro Academy.
Kings, Champs and Aristocrats
Consider Googling the list of the Dividend Champions, Aristocrats and Kings.
Who are they?
Dividend Champions consist of companies that have not only paid a dividend every year over the past 25 years, but have also raised their payout every year in that span as well. Dividend Aristocrats have this criteria too, along with a few others, making it a bit more of an exclusive group.
Dividend Kings have accomplished the same feat, but instead of 25 years, it’s 50 consecutive years!
You probably recognize a few names on that list too, including: Coca-Cola, Johnson & Johnson, and Procter & Gamble. Raising the dividend has become part of these companies’ DNA.
Risks with dividends
While dividends can be great, that doesn’t mean dividend stocks are without risk. If the business is struggling too much, the dividend can become a strain on the company’s balance sheet, prompting management to reduce, eliminate, or pause the dividend.
Watch for companies with a suspiciously high dividend yield. A yield of 8% or 9% or more doesn’t necessarily mean it’s bad, but it could be a sign that investors are losing confidence.
Further, look at what’s called the “payout ratio,” which is a quick calcuation showing how much of a company’s profit are paid out as a dividend. If the dividend commands too high of a measure — 80% is considered a red flag for many investors — then there could be issues down the road. If it’s in excess of 100%, this is considered unsustainable unless it’s short-lived.
The Bottom Line: Dividends can be awfully attractive and over long stretches of time, they can provide a real boost to your total return. But remember that chasing high yields can come with increased risk.
Disclaimer:
Please note that due to market volatility, some of the prices may have already been reached and scenarios played out.