There are tons of books about dividends.
I’ve found a few with over two hundred pages.
Dividend investing is a powerful strategy. But I’ll give you the most valuable information in under 500 words…
A dividend is a distribution of part of a company’s assets to shareholders. The most common is a cash dividend.
Without dividends, shareholders could only collect money when they sell shares.
A dividend is used by stable businesses to return value to the shareholders. Mature businesses can’t always find cost-effective projects. Cash piles up. Smart management then decides to issue dividends. This lets shareholders decide how to use the cash. And the business sticks to its core business model.
For high-growth businesses, dividends shouldn’t be paid. They need the money to expand. If successful, the business will mature and management will start paying dividends.
Dividends don’t lie. A steady payout shows a company is financially stable and shareholder friendly.
Dividend investors find businesses that have a long history of paying and raising dividends. The best businesses keep paying dividends through both the good and tough times. Around 50 companies today make the Dividend Aristocrats list.
The list contains companies that have raised their dividends for at least 25 consecutive years. It includes well known names such as Walmart, Procter & Gamble, and McDonald’s. A few of the companies have raised their dividends for over 40 years.
Investing in businesses that raise dividends is a great strategy for income portfolios.
For example, let’s say you bought one share of Procter & Gamble at the start of 2010 for $62. At that time, it had a $0.44 quarterly dividend. That’s a 2.8% annualized dividend yield ($0.44 × 4 ÷ $62).
By the end of 2015, Procter & Gamble had raised its dividend to $0.663. Based on your $62 purchase, the yield would then be 4.3%. Each year a company raises its dividend, the yield on your initial investment climbs. On top of that, share price climbed to $80 so capital gains can be collected.
For a last example let’s look at an investment in Walmart for 20 years, from 1995 to 2015.
At the start of 1995 you could have bought one Walmart share for $12. At that time Walmart paid a $0.10 annual dividend… almost a 1% yield. But each year the dividend was raised.
Over the 20 years a total of $16.61 was paid in dividends. That’s more than the initial investment. The annual dividend grew to $1.96 and the yield on the $12 investment turned into an incredible 16%.
Dividend investors can keep collecting income. Over time capital gains can also be realized.
To amplify gains, investors will reinvest each dividend. Most brokers let you automatically reinvest the dividends for free. And it’s usually best to reinvest.
Dividend investing is a powerful strategy. Smart investors add great dividend businesses to their portfolios when they trade at cheap prices. And you should too.