Topic: Dividend Stocks

Here are some key tips on dividend investing for beginners

January 15, 2020|by Scott Clayton

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Consider these pointers on dividend investing for beginners to help you get your investing career off to a great start

A dividend is a payment a corporation makes to its shareholders, usually as a distribution of profits. When a corporation earns a profit, it can re-invest that surplus in its business (this is called retained earnings) and/or distribute a fraction of it as a dividend to its shareholders.

A dividend is typically allotted as a fixed amount of money per share so that shareholders receive a payment that is proportionate to the shares they hold. Most dividends are paid quarterly, although some companies pay a monthly dividend.

Here are some considerations on dividend investing for beginners.

The Growing Power of Dividends Learn everything you need to know in '7 Winning Strategies for Dividend Investors' for FREE from The Successful Investor. The Best Canadian Dividend Stocks to Buy: REITS Canada and other Top Canadian Dividend Stocks.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Dividend investing for beginners, and for veteran investors, can lead you to larger returns in the long term

Dividends can produce as much as a third of your total return over long periods.

Dividend stocks rarely get the respect they deserve, especially from beginning investors. That’s because a yearly 2% or 3% or 5% dividend barely seems worth mentioning alongside possible yearly capital gains of 10%, 20% or 30% or more. But dividends are far more reliable that capital gains. A stock that pays a $1 dividend this year will probably do the same next year. (It may even raise the rate to $1.02).

Furthermore, dividends from Canadian companies come with a tax credit. This dividend tax credit—which is available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA—will cut your effective tax rate.

This means that dividend income will be taxed at a lower rate than the same amount of interest income. Investors in the highest tax bracket pay tax of around 29% on dividends, compared to 50% on interest income. At the same time, investors in the highest tax bracket pay tax on capital gains at a rate of about 25%.

Recognize that dividend growth investing for beginners should focus on quality to help you make smart decisions

As with conservative dividend-paying stocks, dividend growth stocks offer investors an added measure of security. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

However, at the same time, it’s important to avoid judging a company based on the fact that it pays a dividend. Nor should you be tempted solely by a high dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price). We say more on that below.

As well, you should always remember that while growth stocks can hold the potential for greater gains than conservative selections, they typically expose you to a higher level of risk—even if they are dividend-paying stocks.

That’s why we look beyond dividend yield when making investment recommendations, and look for dividend stocks that have an established business and at least some history of building revenue and cash flow.

Dividend investing for beginners should always include our three-part Successful Investor strategy for a lower-risk approach to building a portfolio

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

Bonus tip #1: Teach yourself to think like a portfolio manager

Portfolio managers gather information from companies, industry studies and other sources. A good portfolio manager then tries to build their clients a portfolio that make money if things go well, but won’t lose too much if the opinions turn out to be faulty, as often happens.

We do our own stock market research for our newsletters and investment services, and we apply it from a portfolio manager’s perspective. That’s why we advise sticking to mostly well-established companies; they tend to hold on to more value when things go wrong and recover faster.

Bonus tip #2: Use technical analysis to supplement your initial opinion of a company

Use technical analysis to support—not determine—your view of a company. Look at chart readings as one tool among many, but don’t look at the chart for a prediction of what’s going to happen. Look to see if the pattern on the chart seems to support your view of the stock, based on its finances and other fundamentals. But remember that the stock market follows a multitude of factors to varying extents, and the most important or influential factors continually change.

Do you concern yourself with a company’s dividend policy?

The Dividend Irrelevance Theory states that investors need not worry about a company’s dividend policy because they have the option of raising money by selling from their overall portfolio of stocks. What are your thoughts on this?