Dividend stocks are a great way for me to earn passive income as well as getting potential share price appreciation. As an income investor, such companies make up a large part of my overall portfolio. Yet if I rewind back to when I was a beginner investor, there are several points that I wish I’d known. These would have made my life a lot easier. Here are four of those points.
Thinking beyond the dividend
To begin with, I need to understand that dividend calculations are mostly looking to the past, at previously paid dividends. It can be dangerous if I assume the future dividends will be the same as the past. Obviously, I do need to make some assumptions when trying to assess how much income I could get from a stock in the future. But I need to ensure I give myself a bit of a buffer with potential future dividends, especially when looking out several years in advance.
I also need to be aware that dividend stocks aren’t just there to pay out income. Like any other stock, the share price moves over time. This isn’t a bad thing, as hopefully the company I invest in will see its share price appreciate in value over time. This adds to my total return when I come to sell the stock.
The stock could also fall in value, which would detract from the income I receive during my holding period. Either way, the main point here is that I need to be aware that movements in the share price will impact my overall profit and loss on top of any income I get from dividends.
Running the numbers correctly
The main thing I wish I’d properly understood as a beginner investor regarding dividend stocks is how to compare them. The best way is to look at the dividend yield, not the dividend per share. The dividend per share just tells me how much a company is paying me. Yet this figure by itself doesn’t actually tell me much. Rather, I should compare this to the current share price to see what the yield is on my investment.
For example, consider two stocks. One has an annual dividend per share of 20p, the other of 10p. But the second dividend stock actually has a higher yield. How is this possible? If the share price of the first stock is 100p, but the second is 30p. As a proportion, I get more bang for my buck by investing in the second stock.
Sustainable dividend stocks
Another point I think is good to know is to look beyond just the dividend figure. Numbers can only tell me so much, but I need to dig deeper. I want to find out how sustainable the dividend is for the future. So I need to consider whether the company has a strong business model and has good management. I also need to think whether the industry it operates in is growing.
The above four points, I think, can help me make better investment choices when it comes to dividend stocks.