Dividend investing is the most preferred way of establishing wealth and a way of an effective source of income. While they come with a bagful of risks, the returns are much greater. Dividend investments are no tough game, but you need to be well researched and have a basic understanding of how things go about with dividends.
Here we are with some of the basic rules every keen investor must know;
- Quality first
This is the first and most important rule of playing with dividend investments. Go no get tricked by numbers, they can be highly deceptive. Look for the yield while choosing dividend investments, higher yield means higher returns. Another thing to be considered is the stability of stock over a period of time. If the stock has not maintained a sustainable payout level, it might prove fatal.
Going for stability might seem compromising with returns in the short-term but has a tremendous positive effect in the longer run. The reliability factor is hence justified with the quality first approach.
- Go for settled companies
Although the newly established firms may seem promising (no wonder they may even prove to be) but there is no way you can actually measure the performance of a new entrant to the market. If you go traditionally by the show of numbers, past performance is the first indicator that speaks a lot about the stock’s and company’s future.
While you are putting your money to work, why not choose a vehicle that is known to be efficient rather than try your luck on the new duck? It will make you cross the river eventually but with a little wither, a little water and lots of quacks!
Established companies with an excellent track record of paying dividends are the best choice while investing in the long-term. They are known for regular capital generation and are expected to keep doing so.
- Growth potential is the key to Growth investing
Dividend investing is a type of growth investing, you invest your money keeping in mind the long-term returns it will generate ultimately leading to wealth creation. As I mentioned earlier, while some new entrant may sound promising, do not just go by the flow. Do your homework, be well researched. Past performance is not the only parameter you need to track but also the company’s future potential. Have a look at the company’s business model and strategy, what are its investment objectives and investment strategy and then make a decision.
- Do not ignore the payout ratio
The dividend payout ratio tells the investor how much the company is paying to the investors and how is it retaining to itself. It is a measure for the safety of the stock. The payout ratio gives an idea regarding the debts a company owes or how big are its running expenses etc.
If you come across a high-yield company paying dividends generously, it is good to go but be cautious. If the overall income of the company faces as cut down, the investor’s payout also gets affected significantly.
There can be a never-ending debate on this topic- whether to diversify the portfolio or not?
It is always good to have a mixture of funds so that if a particular sector gets affected adversely by the market volatility, the others are there to maintain a balance. At times you may find a sector performing magnificently but remember, nothing is permanent in the investment industry. To tread this path very carefully if you choose to invest all your funds in a single type of instrument.
- Be ready to let loose
Last but not least, know when you have waited too long for them to payout. It is crucial to decide when it is the right time to sell off stocks that have been making losses for a considerable period of time. While on paper, a stock may appear to be value for money but the real value is known once to get invested.
Be vigilant of the market movement and your stock’s performance. Sell when it is required. Be a smart investor and decide efficiently.