What’s so important about the dividend yield? Why do I focus on it equally with the stock price? As a dividend investor I like to have my money work for me with little effort or worry. All investments come with risks. I like to mitigate mine. I do this with dividends. With dividends I don’t rely solely on share price to receive a return on my investment. Also, dividends are what I get paid to have my money tied up for the long term.
What does the dividend yield mean to me? How does it relate to my own investment strategy? I look at the dividend yield as a way to determine how good the stock price is in relation to the dividends being paid. The higher the yield the better the stock price is in relation to the dividend. Let me explain using 2 stocks.
Div Yd Share $ Div $ Home Depot ($HD) 2.15% $272.81 $6.00 Lowes ($LOW) 1.48% $159.82 $2.40
As you can see Home Depot has a high dividend yield not just because of the high dividend it is paying but because the high dividend relative to its share price. If the share price were to increase by 10% the dividend yield would drop to 2%. Additionally, if the share price dropped by 10% the dividend yield would increase to 2.44%.
Again, you can see that Home DEpot and Lowes have dividend yields of 2.15% & 1.48%, respectively. Now, if you took their share prices and switched, you’d end up with a dividend yield of 3.75% for Home Depot (6/159.82) and 0.87% for Lowes. The dividend yield can be affected by a change in either share price or dividend payout.
I view the dividend payout as a gauge to determine how good the share price is in relation to what they payout in dividends. As I stated before, this is just one of the factors I use to decide what stocks to invest in.
Of course, there still are other factors that I look at, such as, P/E Ratio, EPS, & PEG. I also start with companies that have a large MOAT. I don’t prefer to invest in companies which may have an uncertain future, regardless of how much they pay in dividends. But overall, it starts with the Dividend Yield.
How important is the stock price to a dividend investor. Speaking only for myself, stock price is a little less important than the dividend payout and the number of shares owned. As long as the stock price remains within the 52 week price range, all is well for me. If it set a new low, I will definitely take another look at the company to determine if I want to remain invested with it. To me the share price is an opportunity for me to buy additional shares so that I can get more dividends.
You find a lot of stock investor stressed out because of the activity with the stock market, specifically when the market has a downturn or pullback in the prices. That’s because that is all they are banking on, the overall value of the total stock. I don’t sweat it when my stocks take a decrease in price. I look at it as an opportunity to purchase more stocks at a price less than what I originally paid. Don’t get me wrong, I still think that stock price is important but not the #1 factor. It’s in the Top 5. You could end up with a stock like Just Energy Group ($JE) that had a 1 day drop in price of 95% back in Sept-Oct.
That’s too much of a risk for me. I can’t eliminate all risk but I tend to prefer mitigating it as much as a I can.
I’ve been very quiet on my blog so far because there’s nothing happening for me in the investing world. I’m holding my current positions and I have recently received dividend payments on some of my stocks. Those payments I’ve taken and re-invested into the same stocks. At this point I am waiting for the rumored stock market crash so that I can pick up some bargains and to increase my positions on the stocks that I currently own.
In the meantime, as my funds for investments come in I’m just accumulating them into my investment cash account. My focus is to acquire additional dividend stocks, primarily, and to increase my current positions when the opportunity presents itself. This is my sub-strategy for the next 8-12 months. Then I plan on changing gears to focus more on increasing my current positions, primarily, and then to acquire additional dividend stocks when the opportunity presents itself.
But so far all I have been accumulating has been investment funds. I’m looking to find stocks or ETFs that pay dividends on a monthly basis. All of my other criteria still are in place whenever I research where I should invest.
As a dividend investor, dividends are the key factor in deciding if I want to invest in a company or not. As I’ve mentioned in my previous posts there are other additional factors that go into my decision making process to invest or not to invest. But in this post I want to focus on the aspect of dividends. Many investors are growth investors. They buy the stocks of a company for the purpose of selling for a profit within a specific period of time. Others, like myself, invest for the long term to capitalize from a company’s increase in revenues and thus profits, which then translate into dividends. But again, not all dividend stocks are created equal. Some companies pay very low dividend payouts while others pay a substantially higher amount.
One of the key things I look at is the dividend payout relative to the company’s stock price. This is referred to as the Dividend Yield. This is the amount of dividend you will receive for every dollar you have invested. Some are very low, such as Dollar General ($DG), where the yield is 0.67%. Their last dividend payout was $1.44/share. To get that $1.44 you’d have to spend about $218 to buy 1 share.
Then you have McDonalds who just increased their dividends. Even with the last payout being $5/share, this is still only a little over 2% in dividend yield. You’d have to spend about $224 to buy 1 share of stock. That one share would then pay you the $5 in dividends.
There are many similarities between growth stocks and dividend stocks when it comes to deciding if the company is worth investing in or not. But with dividend stocks you’re looking for a continuous income coming in. The growth stock investor is also looking for income but they have to sell all or a portion of their holdings to generate the income. This means that they have to constantly be on the lookout for their next “Deal”. They have to replace the stocks that they sold.
This is the reason that I prefer dividend investing. Once I have researched a company and I have decided that it is worth investing in, all I have to do is hold my investment and collect the dividend payments. As long as there are no drastic or catastrophic changes to the company, there is no reason to sell the stock. Once you decide to buy the stock the only things left to do is 1) collect the dividends and 2) decide when to buy more stocks in the company. This last part is for another post in the future dealing with buy on the DIP (drop in price). After buying the stock and the dividend yield drops, you may want to just hold onto the stock shares you have. If the yield increases that may be a good time to increase the positions you hold. Again, other factors come into play here.
But back to the original premise of the initial dividend yield and how it is a factor in deciding to buy. As I stated before the dividend yield is the key factor for me. I want to get the maximum dividends for the least cost (i.e. stock price). The only time that share price is important is when I am looking to buy more shares. I’m not looking to sell my shares any time soon. As long as the stock price stays fairly stable, I am happy. As long as the dividend keep growing, I’m happy. As long as the company doesn’t reduce the dividend payout 2 periods in a row, I’ll hold on to them shares. My whole focus is to own the maximum number of shares for the least amount of money.
In discussing investments with others I am asked what is my investment strategy? I am going to try to outline my strategy here but you must remember that the strategy is a bit broad and in special cases I will make exceptions to certain criteria.
I only invest in: 1. Long standing, existing businesses. I tend to avoid emerging/startup companies and IPO’s. 2. Companies that pay dividends. This is the rule that is pretty much set in stone. No dividend then no investment from me. 3. Companies that have a dividend yield of between 2.5 to 5%. 4. Companies that have at least a 5 year history of dividend payouts. 5. Companies that show a positive dividend growth. 6. Companies that are rated at Average or below in risk and Average and above in returns. 7. Companies whose stock price allows me to maximize the quantity of share that I own.
The above points are all relative. Such as the dividend yield. If a company is paying out a dividend of $6/share and it’s stock price is $200, this gives me a yield of 3%. This passes my criteria.for dividend yields but does not pass my ability to maximize the number of shares that I own because I am limited by my investment budget. If I have only $200 to invest each month, buying the one stock for $200 only gets me that 1 share. But if I can buy another stock that sells for $50/share and pays 3% dividend yield I can get 4 shares. The dividends I can get will be the same for both at $6 but when I re-invest the $6 I can only get 0.03 shares of the $200/share stock but 0.12 shares of the $50/share stock. I try to maximize shares owned and maximize dividends earned.
I am focusing on the growth of my stock investments based on share growth in addition to any increase in stock price value. Share growth is more critical to me than share price growth. I will increase my position with a specific stock if the share price drops or increases no more than 10%. If the share price increases more than 10% I will just hold and wait for the next DRIP.
I’ll be detailing my different strategy points in later postings.
Since the beginning of the week I took notice of Intel Corp ($INTC) stock price. Seeing as my investment funds are limited, I was hesitant in putting this stock on my watchlist. Upon careful review I think that this would be a prime candidate for my dividend portfolio.
What am I seeing? I’m seeing a stock trading at the low end of its 52 week range while at the same time paying out a very decent dividend of 2.67%. That’s something that I look for. Higher dividend payout relative to its share price. Its revenue growth is above the industry average, and there’s room to grow the dividends because it is below the industry average.
So, I’ll add this company’s stock price to my watchlist and see what happens. If the share price drops further than the dividend yield goes higher and makes this stock more desirable for me. I prefer a dividend yield that is high relative to its price. To me it is more important to have a high, sustainable payout per share than just high share price. Dividends are paid on a per share price so I’m interested in picking up as many shares as I can.
I also have certain criteria for choosing specific dividend stocks. As I mentioned before, a high dividend yield. I like my yields around 5% or higher but based on the company, its dividend history and growth, I can tolerate around 2% or higher. If the company pays out a decent dividend payout but the yield is below 2% then I’ll wait for the share price to drop. There are a few companies out there that pay a very decent dividend but their share price is too high for what I would get in dividends, as noted by a low (under 2%) dividend yield. To me that would be like paying a premium price.