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Dividend Investing Strategy (All You Need To Know)

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Let me explain to you the dividend stock investing strategy and how it works!

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What Is A Dividend Investing Strategy 

A dividend investing strategy is a type of strategy where the investor buys shares in dividend-paying stocks and holds on to the shares to collect dividends in the future.

The objective of the dividend investing strategy is for the investor to receive income in the form of dividend payments paid by the stock in his or her portfolio.

There are many publicly traded companies, mutual funds, or other securities that pay dividends to their shareholders.

It’s important to remember that companies do not have any obligation to pay dividends to their shareholders.

On the other hand, others choose to distribute their net profits or money held in retained earnings in cash to their shareholders on a monthly, quarterly, or even yearly basis.

A dividend strategy for investing is a type of strategy that consists of identifying companies that pay dividends and making strategic investments in those companies to earn an income and make money.

What Are Dividends

Before we get into the specifics of the dividend stock strategy for investing, it’s important to know what a dividend represents.

In essence, cash dividends are distributions of profit made by companies to their shareholders.

Typically, a company’s board of directors will declare dividends setting out the dividend record date, amount, and payment date.

When that announcement is made, investors can purchase shares of that company and be entitled to receive dividends all the way to the ex-dividend date.

Key Dividend Metrics

There are a few important metrics to consider when investing in stocks for dividends:

  • Dividend yield
  • Dividends per share 
  • Dividend payout ratio
  • Earnings per share 

The dividend yield represents the percentage cash return you are expected to receive by investing in the stock.

For example, if the stock price per share is $50 paying out a dividend of $2 per year on a per-share basis, your dividend yield is 4%.

The dividend per share is a common metric that indicates how much dividends the stock pays per share (for instance $2 per share per year).

The dividend payout ratio is the percentage of the company’s profits that are paid out to shareholders.

Finally, the earnings per share refers to how much the company has earned in revenues on a per-share basis.

Dividend Yield

One of the most popular and commonly referred to dividend metric is the dividend yield.

The dividend yield is the ratio between the company’s cash dividend payment distributed to its shareholders in relation to the value of the stock.

The higher the dividend yield, the more you’ll receive in cash dividends for every stock purchased.

For example, if you are looking to purchase shares of stock at $100 per share paying $5 of dividends per year, the dividend yield is 5%.

Getting a high dividend yield, at first glance, appears to be a good thing.

However, you should be careful as in some cases the dividend yield artificially goes up when the stock is not performing well and its stock price is declining in value.

Assessing Dividend Stocks

It’s best to analyze the stock you are going to purchase so you can make an informed decision as not all dividend paying stocks can be considered safe investments. 

Since dividends are paid out of the company’s profits, it’s easy to assume that the company is profitable.

Although this assumption holds true in many cases, it’s not necessarily the case all the time.

A prudent investor should consider and assess the fundamentals of the dividend stock candidate before pulling the trigger for the purchase.

Some of the elements you may consider are:

  • Company’s revenues
  • Dividend payout ratio 
  • Company’s leverage ratios 
  • Cash flows 
  • Company’s earnings growth over the years 
  • Capital returned through dividends or share buybacks 
  • Company’s history in raising dividends over the years 

Types of Dividend Investing Strategies

Let’s look at the different types of dividend investing strategies that investors may consider.

Dividend Growth Investing

The dividend growth investing strategy is a type of dividend investing strategy where the investor is looking to:

  • Purchase different shares of stock paying dividends
  • The dividends are expected to grow at a rate higher than inflation
  • The dividend stock will be held for a long-term investment horizon
  • The company has a long history of paying dividends and growing its dividends over the years

The idea of the dividend growth strategy is to purchase company stocks that pay dividends, where the dividend cash flow is expected to be increased over time, and that the company is expected to pay dividends for a long time to come.

High Dividend Investing Strategies

A high dividend investing strategy is a type of strategy where the investor is looking to:

  • Find stocks that pay a high amount of dividends
  • Is prepared to sell the stock if the stock price drops in value 

For the investor, the main consideration is to earn high dividend cash for so long as the company offers a high yield.

However, if the investor considers that the company may reduce or slash dividends, then the investor is prepared to quickly sell the stock.

Dividend Income Investing

The dividend income investing strategy is a type of dividend stock portfolio strategy where the investor is looking to:

  • Purchase shares of stock that regularly pay dividends
  • The shares offer a high enough dividend yield while remaining safe
  • The investor wants to pocket the cash flow

The main objective of a dividend income investing strategy is to purchase dividend shares that pay dividends so the investor can complement his or her income (for example retired investors tend to adopt this strategy).

Dividend Capture Investing 

Dividend capture is a type of dividend investing strategy where the investor’s objective is to invest in stocks that have declared dividends by buying the stock right before the ex-dividend date and selling it after.

The objective of the investor is to buy the stock and be considered a shareholder of record on the dividend record date entitling him or her to receive dividends.

As such, the investor is taking a long position in a stock for a short period of time to “capture” the dividends.

Dividend Reinvestment Plan

A dividend reinvestment plan is a powerful dividend investing strategy that provides you with the benefits of dividend investing and also allows you to take advantage of the compounded growth mechanics. 

In essence, some dividend paying companies offer their shareholders a dividend reinvestment plan either themselves or through their stock transfer allowing you to fully reinvest your dividends to buy more shares.

The longer you keep your investment and reinvest your dividends, the more shares you accumulate in the stock allowing you to get more dividends at the next dividend payment and to magnify your total return if the stock price goes up.

Your Dividend Investing Strategy Objectives

What is the best dividend investing strategy to adopt?

In essence, the type of dividend investing strategy that is the best for you will depend on your investment objectives along with the timeframe that you have in mind.

Here are some of the main investing objectives pursued by dividend investors.

Total Returns

Many dividend investors consider that the best dividend strategy is aimed to generate a higher total return.

In essence, if you purchase quality stocks that have the potential to pay you dividends for many years to come, increase their dividend payments, and where the stock price will appreciate, you will generate a very good overall return (or total return).

For example, imagine you buy the stock today for $50 paying you $2 of dividends per year. 

If you keep the stock for 25 years, you will not only collect $2 per year (and possibly grow every year) but your stock price may appreciate to $200, $300, $400 or more.

This way, not only do you receive a good return through the dividend cash flows but also benefited from a strong stock price appreciation.

Steady Income

Dividend investors are attracted by the idea of getting a steady stream of income over time.

Older investors may want to access the cash dividends to pay for their living expenses whereas younger investors may want to reinvest all their dividends for greater returns.

In both cases, the investor is looking to receive a constant and passive stream of income.

Dividend strategy investing is a great way to earn passive income when you’re looking to have your money work to make more money for you.

Reduced Risk 

Investing in dividend stocks generally tends to be a safer type of investment than investing in other types of stocks like penny stocks or growth stocks.

If you invest in companies that have a long history of paying dividends, operate in profitable industries, have a track record of showing strong revenue growth over the years, and have the potential to generate important returns in the future are good investment candidates.

Many dividend paying companies are well-established companies in operation for years having steady and growth revenues allowing them to pay dividends to shareholders over time.

These types of dividend stocks will provide you with less financial risk exposure and less price volatility than other types of stocks like growth stocks.

High Dividend Yields

Dividend investors will also tend to favor stocks offering higher dividend yields.

In other words, the higher the dividend yield, the higher the proportion of the cash dividends paid to the stockholder in relation to the stock price.

Although the dividend yield should be a factor to consider, it’s important not to fall into the “newbie” dividend yield trap.

A high dividend yield may not necessarily mean that the stock is worth purchasing as the yield may have artificially gone up due to a drop in the stock price, bad financial results, or economic factors affecting the stock.

Retired investors will want to get quality and safe dividend stocks with the highest yield possible so they can have a higher retirement income.

Younger investors should favor companies that pay consistent dividends over a long period of time so they can take advantage of the yield but also the capital appreciation on their investment.

Dividend Stock Investing Strategy Takeaways 

So, there you have it folks!

What does dividend investing strategy mean?

What is a good dividend investment strategy?

Although there are different types of dividend investing strategies that may be adopted, in most cases, the dividend strategy investing consists of buying shares of stock that pay dividends and holding on to them for dividend income.

The main advantage of this strategy is that the investor will receive cash distributions in the form of dividends and can potentially earn additional returns if the stock price appreciates in value as well.

Dividend investing is a great way for passive investors to make money and build wealth over time.

According to the Hartford Funds analysis, more than 78% of the total returns of the S&P 500 index have come from dividends since 1970.

This means that if you had invested money in a portfolio similar to the S&P 500 index, you would have generated over three quarters of your returns from dividends.

A dividend portfolio strategy is a very good approach to make money over mid-term to a long-term investment time horizon and is one of my personal favorite investment strategies.

I hope you now have the essential knowledge in dealing with strategies for dividend investing so you can develop your wealth over time.

Good luck!

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Just so you know a little about me!

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With that being said, let’s head right back to our main topic!

Dividend Investing Strategy Summary

  • A dividend investing strategy is a type of investment strategy where the investor invests in dividend paying stocks to attain his or her investment objectives over a course of an investment time horizon
  • Many investors aim for purchasing quality stocks that have the ability to pay dividends consistently over time and offer a relatively high yield
  • There are different types of dividend investing strategies such as investing for dividend income, for growth, to reinvest the dividends, or to capture the dividends 
  • Dividend stocks tend to be safer investments but it’s important that you make a well-informed investing decision as not all dividend paying stocks are safe or viable to invest in
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Dividend record date
Dividend reinvestment plan 
Dividend tax
Ex-distribution
Growth investing 
Investment returns 
Ordinary dividends 
P/E ratio
Qualified dividends
Retained earnings 
Special dividends
Stock dividends 
Stock splits 
Total return 
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