2nd Skies Trading

Investing in Dividend Stocks

Dividend stock investing gives stock traders and investors the opportunity to create passive income, along with capital appreciation and long-term growth. However, owning a dividend yielding stock by itself does not make it a good investment, and this can create confusion as to which stocks to invest for their dividends.

There are many factors to consider when investing in dividend yielding stocks to consider. Below we’ve provided our list of what to look for in dividend stocks so you have the tools needed to find great dividend stocks to invest in.

Then we’re going to share with you 3 dividend stocks to consider for your investing portfolio, along with several dividend aristocrats.

What are dividends and what to look for in dividend stocks?

For those publicly traded companies that have extra cash on their balance sheets, they have options on what to do with that extra cash, such as reinvest their money into R&D, expand existing operations, consider an acquisition.

But another option is to pay out their shareholders which incentivizes them to hold or buy new shares while brining in new investors to acquire shares, thus supporting the stock price.

What is a dividend?

Now a dividend is a payment from the company directly to the shareholders which often comes quarterly, and in fixed periods.
To give you an example, the company can give you a dollar value per share you own, or a fixed % of the shares you own quarterly.
Investors can either take the cash value of what they are given in dividends, or have those proceeds be received as partial shares of the company.

Investing in Dividend Stocks

Passive income or increasing overall shares?

Now if you’re looking for passive income, you can take the dividend as cash. But if you’re looking to build your stock position in the company long time (since you think the company has potential as a long term investment), you can receive those partial shares, thus increasing your share size in the stock.

Which companies offer dividends?

Its important to understand which companies often give dividends. If a company is new and has growth initiatives to drive new markets and increase market share, they will often not give dividends because they need that extra cash to build their business.

But if you’re a well established business with predictable sales, while they’ll invest in themselves, by offering a dividend, it attracts value investors, which creates stability in the stock.

How to calculate dividends?

The two most important factors to consider when looking at dividends are dividend payment and payout ratio.
The dividend yield measures how much you receive in dividends vs how much the stock costs.
A simple equation to understand this is dividend payment / price of the stock.
Using an example, lets say you own a stock that pays out $2 for every share you own, every quarter (4x per year), which comes out to $8 per year.

If the current price of the stock is $100, and you own 1 share at $100, and you’re making $8 per year, the yield is $8 (dividend payout) / $100 stock price, which comes out to an 8% dividend yield.

Across the S&P 500, the average yield is approximately 2%, but many can offer 4%, 6% or even up to 10%.

Dividends can increase or decrease

Its important to note dividends can increase or decrease over time, especially during recessions (like Covid 19) where dozens of companies cut their dividends to compensate for lost yield.

Hence you cannot think of a dividend as a sure thing, especially during bear markets or recessions.

Key Concepts to help you find great dividends stocks

  1. Dividend history – companies can increase or decrease dividends over time. If a company raises its dividend consistently, that is the sign of a healthy company with a stable balance sheet.
  2. Revenue and earnings growth – stability in the dividend companies you invest in is key as it gives you a more reliable metric to measure your dividend growth and potential income.
    If the revenue and earnings growth is steady quarter after quarter, that’s a well run company. If the earnings are all over the map, up one quarter and then down the next with no predictability, that could be a sign of trouble.
  3. High yield – obviously higher yields are preferable, but only if the company is strong and can maintain it without hurting their business.
  4. Competitive advantages – often a defining feature of a company, when a business has a durable competitive advantage, such as a unique product (think Apple), algorithm in their software (Google search) , or high barrier to entry (Tesla cars and technology), these advantages make it hard for customers to buy other products. This allows the company to enjoy the advantage and revenues since there are less competitors out there offering a worthy viable product.

By using these 4 metrics above, you can find potentially good dividend stocks to add to your investment portfolio.

Dividend investing is a long term strategy

It’s important to understand that investing in dividend stocks most often yield the best results when it’s done over a long term horizon.
Remember, there are two ways you make money from investing in dividend stocks:

  1. Capital appreciation of the stock
  2. Dividend returns

While the majority of your income from investing in stocks will be capital appreciation of the stock over time, the dividend offers a second income, and can provide one in volatile times, particularly when the stock loses value.

Hence, when investing in dividend stocks, you’re concerned with the overall trend over years, not the day-to-day price fluctuations.
Thus, the key is to find companies that have long term potential, growth and value while lesser volatility. These can provide stable incomes over the years while growing massively over time through capital appreciation.

Investing in Dividend Stocks

3 Dividend Stocks To Buy

  1. Apple (Nasdaq: AAPL) – one of the most abundant companies in the world, Apple is a stalwart tech stock giant that has recently started paying out dividends since its earlier years were dedicated towards growth. With one of the most loyal customer bases globally, and an incredibly tight ecosystem of technology, Apple has been expanding its revenue beyond phones into wearables and subscription services. While the dividend is only .6% (as of July 21’), it’s a stock that has stable gains over the years.
  2. Verizon (NYSE: VZ) – one of the most ubiquitous wireless communication providers in the US, Verizon has multiple streams of income, like high speed internet service, 4G & 5G wireless service and more giving it a utility-like income from its core products, which everyone pretty much needs these days (i.e. cell phone service and data plans).This combined with lower debts vs most of its competitors has earned it a place among dividend investors.
    Verizon should also be one of the top beneficiaries and providers of the consumer transition to 5G mobile technology, enjoying strong prospects for future growth and revenue. Oh and it currently provides a 4.47% dividend, making a one of the stronger dividend yields available while maintaining lower volatility in price.
  3. Microsoft (Nasdaq: MSFT) – One of the most well know global brands in computer operating systems and software (i.e. Microsoft Office), MSFT has grown massively in the last several years, increasing sales while maintaining recurring subscription based revenue from its suite of products. Along with having a solid balance sheet, MSFT recently won a part of the JEDI cloud computing contract for the US gov’t, providing billions in contract revenue for the future. With low debt and lots of cash on hand, Microsoft is a stock with potential long term prospects while providing a respectable .81% dividend.

What are dividend aristocrat stocks?

The dividend aristocrat index (a part of the S&P indices) is a group of companies that have minimally increased their divides for at least 25 consecutive years.

This creates a list of companies which have given investors a consistent dividend during bull and bear markets, thus providing some stability to investor portfolios.

Considering their long track record of dividend increases, this makes them potentially more stable investments than your average dividend stock.

We’ve listed a few below to consider for your stock portfolio:

  1. Target (NYSE: TGT) – with a dividend yield of 1.43% (as of July 21’), we feel the long term prospects for Target are strong.
  2. Johnson & Johnson (NYSE: JNJ) – with a portfolio of health care products from Tylenol, Band-aids and more, JNJ offers a 2.5% yield and has been enjoying solid growth and capital appreciation since Covid.
  3. 3M (NYSE: MMM) – one of the older and heavily diversified industrial conglomerates, 3M sports a solid 2.96% dividend and has been steadily increasing in share price since the Covid crash.

In Closing

Every long-term stock investor should consider dividend stocks as potential candidates into their portfolio.
Stock investors should consider a combination of stocks from the dividend aristocrats while adding some high yielders to their portfolio.

By having a solid portion of your portfolio holding stocks with dividends, you add stocks that offer passive income, potential stability and solid prospects for capital appreciation.

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