The Case for Investing in Dividend-Paying Stocks

I am all about dividend paying stocks. I love investing and this is one of the ways I plan to sustain myself in early retirement from my current job. 

However, nothing in life is easy and investing in dividend stocks requires a bit of homework especially if you are basing your future on its ability to sustain itself.

Here are key characteristics to watch out for when choosing dividend paying stocks. But before I begin, I must warn you that what you read in my blogs are my own research and homework and I am not a professional financial advisor. I am just a normal person on my way to achieving financial freedom by learning to better allocate my assets by making them work for me instead of the other way around. For a complete list of my privacy policies and disclosures, please visit my terms and conditions page located on the left hand side of the blog's main page.

Continuous streak of increasing dividend payments over time -  by time I mean decades with an S. I raise an eyebrow when I see dividend cuts during some years or when the company keeps paying dividends for cutting the dividend amount in half. This tends to happen when the economy isn’t doing great and the company doesn’t have enough cash to sustain itself without cutting off their dividends. 

It’s not necessarily a bad thing, because the company needs to survive first of all, but if you picked that company because of their dividends, then that’s not such a great fit after all. I have investments in great companies who happen to pay dividends and some aren’t consistent with it, but I didn’t choose them for my dividend portfolio. When I see this happen in my Div (i will just use div for dividends) portfolio, that’s a red flag and requires added research. At that point I may or may not move it out of the div portfolio or just sell it if the prospects have changed.

Speaking of prospects; A company’s prospect is the second characteristic I look into. I want to be sure that the company has a strong and stable business model that can carry itself decades into the future. Doing this leg work early on is a lot of hard work, but it will pay off in spades. Imagine investing in a lot of weak companies who can’t last 10 - 30 years. The analogy is the same as spending time doing a lot of research before buying a house. That way you do not need to worry about it as much down the road and not be forced to move shortly after because you didn’t research the neighborhood etc. How are they making money? How can they protect themselves from competition 30 years from now? Why do you think they will still be around 30 years from now?

Look at the numbers. At the most basic level. You should learn how to read a balance sheet. Check out their financial statements and see how much money they actually get to keep at the end of the day. If you are investing in public companies you can get this information for free at SEC.GOV. Learn about the cash flow of the company and their dividend payout ratio. If the company is very mature and old, they no longer need the money for research and development, then it makes sense that most of their cash gets returned to their shareholders in the form of dividends. But if the company is a type of company that can benefit from increasing their funding with R&D in order to stay competitive, but they aren’t doing that, then that’s also a red flag. Remember that they need to take care of themselves first before they can really take care of others (Maslow’s Hierarchy).

Don’t get fooled by dividend yield (%). It is the ratio of dividends paid out per year relative to its stock price. When you see that a company who had dividend yields of 3% over the years all of a sudden get up to DY of 6% (for example) that could be a red flag. That means that the company’s share price is dropping. But why? You have to investigate this further. Don’t get lured into a dividend trap. It comes down to sustainability. DY’s (dividend yield) can fluctuate during good and bad economic times. It’s a good factor to look at but do not make your decision based solely on their DY.

Lastly, look at the company’s track record throughout the years. Were they able to navigate the bad times without cutting dividends in half or canceling them? That means that the company is great with capital allocation. This also warrants investigation into their management team. A company is only as good as the people who keep it running. A company may have started with stellar management, but over the years people get old and die, and they sometimes get replaced with a not so great team. 

If all this sounds like a bit much for you, then maybe you can benefit more from investing in dividend funds and ETFs instead. It can minimize the homework you need to do in order to not lose money. But investing in those is also fool-proof just in case you are wondering. But I can cover that in another blog. 
A thing to note is that nothing in life is certain and investments are never guaranteed. So even with all the research in the world, ultimately we still cannot predict the future. At the very least we can do the best we can and perform educated decisions instead of blindly following the masses.

That is all for now. 

See you on the next one!

-Pam

As a reminder, I created this blog to share information and to increase everyone's financial literacy. This serves as my notebook that I willingly share publicly to help others increase their curiosity and knowledge in wealth building and money management. I am not an official financial advisor, lawyer, or accountant. You will not find legal advice in this blog. Read the full terms and conditions here.