David Van Knapp has written some great things on investing in dividends over the years.
I’ll try and summarize some of the things I have learned from his writings.
You can also learn more about DVK, here, at his homepage here.
Investing in Dividends – Top Resources Available
1. Dividends sidestep the broader stock market.
Yes, dividends and stock prices are linked to corporate earnings, but they have differing mechanisms when it comes to delivering cash to investors. Corporate earnings translate to market prices. But the market can easily overvalue or undervalue prices. Multiples can run hot, or stocks can take a nosedive regardless of underlying fundamentals. Dividends, however, are decided by companies and tend to perform much more smoothly than price performance.
Stock price has almost no influence on the dividends earned from a well-constructed dividend portfolio.
2. There’s no need to obsess over volatility when you are focused on dividends.
Dividend growth investors have a great weight lifted off their shoulders. The day-to-day market is what casual investors have become fixated on. Subsequently, short-term investing becomes what most will focus on. As a dividend growth investor, you can imagine yourself as a partner with the business that you invest in. There is less emphasis placed on winning trade battles focused squarely on price appreciation.
3. Dividends are straight cash!
Just like Randy Moss said, dividends are “straight cash homie.” Each dividend represents a positive return to shareholders and there is no need to sell stock or exercise and option to recognize a gain.
4. Dividends provide valuable insight into the nature of the companies you invested in.
Dividends are paid quarterly. If a company is continuously raising its dividend according to an established schedule, that in itself is important information regarding the financial health of the organization. This is again true when compared to the market price. Dividend increases are usually a positive sign about the company. In raising the corporate dividend, management is indicating that it has confidence in the business.
5. Dividend growth companies are typically outstanding businesses.
Most of these growth companies have the following attributes:
– Steady growth
– Sustainable competitive advantages
– Solid balance sheets
– The strength needed to survive recessions and market downturns
– Defensible market share
– Positive cash flow
– Low debt or high interest coverage ratios
6. Companies that use their dividend programs wisely tend to persist.
As aforementioned, a dividend increase tends to be a positive sign that management has confidence in the company’s prospects. And a strong dividend program likely means that management is making smart choices with the cash remaining after the dividend has been paid. Dividend programs tend to be woven into the culture of the company over the long run; a company with a long history of dividend increases rarely abandons that policy.
7. Dividend payouts tend to rise over time.
This is a positive attribute of dividend growth stocks. It is why dividend growth investors are often content with stock prices that trend sideways. It is why retirees seeking to outpace inflation on a fixed-income become attracted to dividend growth stocks. Lastly, it is why many income investors consider dividend growth stocks to be more attractive than bonds, whose yields are fixed.
8. Dividends have a low tax rate.
For most taxpayers, the current maximum Federal tax rate on qualified dividends is 15 percent.
9. You can reinvest dividends to accelerate the effects of compounding.
Shareholders can either reinvest or keep dividends. As dividends are reinvested to purchase more shares, the number of shares on which the investor receives future dividends continues to grow. It is clear to see that this builds wealth at an accelerating pace. Your share base grows faster because of the reinvestments. And the growing number of shares increases the dividends you receive.
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10. Rising dividends serve as an effective hedge to inflation.
Inflation erodes the purchasing value of the dollar over time. In contrast, the income from dividend growth stocks generally grows faster than inflation, thus protecting against inflation risk. To be sure, however, there are periods where inflation exceeds dividend growth.
Great article here on this:
65 Dividend Aristocrats
The S&P 500 Dividend Aristocrats Index is a list of companies in the S&P 500 that have paid higher dividends every year for at least 25 consecutive years. The S&P Dow Jones Indices maintain the list it is and updated annually in January.
To be included in the list, constituents must meet several criteria:
Universe: Must be a member of the S&P 500.
Selection: Must have increased dividends every year for at least 25 consecutive years.
Market Cap: Must have a float-adjusted market cap of at least $3 billion on the rebalancing date.
Liquidity: Must have an average daily value traded of at least $5 million for the trailing three months on the rebalancing date.
Stock: At each rebalancing, there must be at least 40 members.
Sector: No GICS sector can exceed 30% of the index weight.
Note that only regular cash dividends count. Furthermore, if a company suspends or cuts its dividend or is removed from the S&P 500 index, it is removed from the list of Dividend Aristocrats.
There are special rules for spin-offs, particularly those occurring after January 1, 2013.
Assessing Quality and Ranking Stocks
Use DVK Quality Snapshots to assess the quality of stocks. The system employs five quality indicators and assigns 0-5 points to each quality indicator, for a maximum of 25 points.
David Van Knapp: https://seekingalpha.com/author/david-van-knapp#regular_articles
To rank stocks, I sort them by quality score and break ties by considering up to three factors, in turn:
- SSD Dividend Safety Scores
- S&P Credit Ratings
- Dividend Yield
Each table presents key metrics of interest to dividend growth investors, along with quality indicators and my valuations:
- Yrs: years of consecutive dividend increases
- Qual: DVK Quality Snapshots quality score
- Fwd Yield: forward dividend yield for a recent share Price
- 5-Avg Yield: 5-year average dividend yield
- 5-DGR: 5-year compound annual growth rate of the dividend
- 5-YOC: the projected yield on cost after five years of investment
- C#: Chowder Number, a popular metric for screening dividend growth stocks
- 5-TTR: 5-year compound trailing total returns
- VL Safety Rank: Value Line Safety Rank
- VL Fin Stren: Value Line’s Financial Strength ratings
- MS Econ Moat: Morningstar Economic Moat
- S&P Cred Rating: S&P Global Credit Ratings
About the Author and Creator of this System
FerdiS invests in dividend growth stocks and writes options to boost dividend income. He manages DivGro, a portfolio of mainly dividend growth stocks created in January 2013. With investment and trading experience spanning nearly 20 years, FerdiS enjoys writing articles about dividend growth investing, options trading, stock selection, portfolio management, and passive income generation. His DivGro blog hosts more than 1,000 posts and a live, public spreadsheet with full details of his DivGro portfolio, allowing readers to follow along in his investment journey. FerdiS is collaborating with the founders of Portfolio Insight, an online platform for portfolio management and investment analysis. Together, we maintain and publish Dividend Radar, a free spreadsheet of dividend growth stocks, on a weekly basis.
You can learn more about the Author and this System here: https://divgro.blogspot.com/
For another Investor Weekly article that dives into the power of dividends, follow this link: Dividend Investing – How it Works.
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