Dividend investing offers some of the best financial opportunities for new and seasoned investors alike. The proof is in the numbers: according to economic data from 1927 to 2014, growth rates for dividend-paying stocks (10.4%) substantially outperformed non dividend paying stocks (8.5%).
If you typically invest in non dividend paying stocks, then you could be missing out on a lucrative opportunity to boost your long-term portfolio growth, in addition to the short-term income potential presented by stocks that pay dividends to shareholders on a quarterly or monthly basis.
Related: A Dividend ETF Delivering a Solid Performance
If you’ve considered getting more involved in dividend investing, then here’s everything you need to know before reallocating your investments into dividend-paying stocks:
What is a Dividend?
Simply put, dividends are the portions of a company’s earnings that are paid out to shareholders. The company’s board of directors ultimately dictates the dividend amount, which may come in the form of cash or stock shares.
Whereas other types of investments that simply fluctuate in value until you choose to sell, a stock that pays dividends not only grows in value (hopefully!) but also pays out a small sum to shareholders on a regular basis. This alone makes dividend-paying stocks vital components of any successful investing strategy.
What are Dividend Stocks?
Dividend stocks are those that pay out dividends to shareholders on a regular basis (typically on a quarterly or monthly basis). When it comes to dividend investing, you’ll want to choose stocks that offer favorable dividend yields (annual dividends per share divided by the price per share). Dividends can increase or decrease over time, depending on the company’s performance and other related factors. For reference, the average dividend yield for the S&P 500 is 1.83% (as of May 2018).
Rather than choosing stocks that currently have high dividend yields, a smarter dividend investing strategy would be to analyze the historical dividend growth rate. This way, you’ll be more likely to invest with a company that has a proven track record of consistency with its shareholders, instead of a company that just so happens to be having a great year but didn’t pay its shareholders great dividends in the past.