5 Tips for Dividend Investing Beginners
With their steady payments to shareholders, dividend-paying stocks are a good option for cautious investors. If you want to see a regular income off your investments or to gather funds to re-invest, then they can be a good source of income or a way to grow your portfolio. If you’re new to dividend investing, where should you start?
Invest Broadly
As with any sort of investment, it’s not a good idea to be too focused.
If you’re reliant on one or two companies, then you’ll be vulnerable if one of them hits trouble.
To avoid this, find lots of dividend-paying companies and invest in them at the same time.
That way, if one company struggles for a while, then you’ll still receive income from the rest. Your income from the dividends will also be spread out, based on when the different companies pay out.
Try to find companies in different sectors. This way, you’ll also be protected from shifts in a particular market.
Invest in Steady Growth
Before investing in dividend-paying companies, look at their performance over time.
While past performance isn’t a guarantee of future behaviour, it’s one of the best pieces of evidence you have.
To make the most out of dividend investment, you want companies that will keep raising their dividend payments.
Look for companies with steady long-term dividend growth, as they’re likely to continue this pattern.
Also look at their underlying performance. If they have steady revenue and earnings growth, then they’re more likely to be able to keep increasing those dividends.
Minimise Risk
Dividend investing is a strategy designed for stability and income over time, not high risk, high return gambles.
When done well, it’s safe and reliable, providing a steady flow of income.
Because of this, beginner dividend investors should focus on low-risk companies. This way, you can feel comfortable that you’ll keep receiving those dividends over time.
To minimise risk, look at the company’s performance and strategy. Have its value and earnings been relatively stable? Is it well established and secure in its sector? Do the management follow safe, low-risk strategies?
Most importantly, look at the balance sheet.
This is the strongest indicator of the health and stability of a company and of whether it’s likely to endure.
A favourable balance of assets and liabilities won’t just mean that the company is a low- risk investment.
It also means that there’s more shareholder equity in the company and so more money available to pay out dividends.
Invest at the Right Time
Timing is everything. Stocks in good companies tend to be expensive, so you’ll want to look for opportunities to minimise your costs.
Out of the low risk, steady growth companies you’ve identified, pick out the ones whose share prices are relatively low.
These are likely to be the ones you want to invest in now, while they’re going at a reasonable price.
Keep a note of the rest and keep an eye on them, watching out for when their share prices fall and you can get them at a good value.
The time you’ve put into research is an investment in itself and shouldn’t go to waste.
A low share price isn’t everything.
It can mean that a company is a bargain, but it can also be an indicator that it’s in trouble.
So before investing in those companies you’ve identified for right now, check their dividend yields. Only invest if these are relatively high.
This has two advantages. The first is obvious – you know you’re getting a decent payout.
But the second is more subtle. If the company can spare funds to pay good dividends, then its leadership team are confident about their financial future.
If that’s the case, then the low share price is more likely to be a blip and less likely to indicate real trouble.
Know When to Sell
Identifying the right time to sell is critical. Fortunately, you can work out when to sell by reversing the rules for when to buy.
Is the company’s growth rate falling?
Is its risk profile rising, with fewer assets and more liabilities or unexpected gambles by the senior officers?
Is the dividend yield falling, so that you’re getting less out of your investment?
Has the share price risen, allowing you to make a profit on a sale?
It’s unlikely that all these factors will shift in the same direction at once, so deciding when to sell comes down to combining and balancing them.
When the stability, growth, and dividend yield for the company is no longer attractive, then it’s probably time to sell, with the share price helping you decide exactly when to make your move.
Dividend shares are a good option for long-term investment.
Buying the right shares and selling at the right time can add stability and an income stream to your portfolio.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
