Tag Archives: dividend yield

Relavence of the Dividend Yield

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.

Importance Of Stock Price To A Dividend Investor

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.

Modifying Your Investment Strategy

I’ve decide that it was time to modify my investment strategy. Not because it was wrong but because it wasn’t moving things along fast enough. Again, as I’ve stated before I have a timeline that is considerably shorter than the normal “rule of thumb” timeline of 30 years. My timeline is only 5 years, albeit a rolling 5 years. One cannot turn back the clock and try to redo the past so all we can do is work with what we have. My goal is still to stop working and live off of the dividends. To do so I have to have a extremely larger amount of money invested than I do presently. To this end I am putting any discretionary funds into investments.

I have outlined my strategy previous but now I’m going to be adding another point. And that is that I will be focusing on companies and funds that pay dividends on a monthly basis. Quarterly payouts are nice, but monthly is much better. If you are a believer in compound interest then you know what I am getting at. Why wait for the quarterly dividend in order to re-invest when you can re-invest the dividend on a monthly basis. All other criteria in my strategy still holds.

My focus will be Exchange Traded Funds (ETF). This will allow me to diversify and to minimize my risk. I get to own a little bit of everything instead of trying to own everything all at once. I also don’t have to keep a constant eye on the market value to determine when the stock no longer performs to meet my goals. Someone else does that. Yes, I’m willing to pay someone to do that…to a limit. I still have my criteria of not getting ETFs that charge over 0.6% in costs. There is a high yield ETF that has a dividend yield of 7.77%. Seems good. Except that the Expense Ratio is 1.25%. Morningstar rates the Risk as Above Average and rates the Returns as Low. So, I am not going to blindly invest just on a high dividend yield. I am not a great risk taker. Especially with an abbreviated timeline. I like my risks to be Average or Below. The returns should be rated Average or Above.

So, what caused me to tweak my strategy? I had viewed the video 5 Monthly HIGH Dividend ETFs (5%+) ETFs that Pay Monthly Dividends that I had posted on my blog previously. This video is put out by Learn To Invest. He does put out quite a few useful tutorial videos about investing. This one got me to thinking that his presentation of ETFs could help me accelerate my investment activity and thus increase my investment values at a higher pace.  So, I have to determine if I should liquidate all or some of my individual stocks and put the proceeds into ETFs or do I just invest my money solely into ETFs going forward from now on, leaving the individual stocks untouched.  

So, follow my blog to learn what I end up doing. Maybe you’ll get something out of this taht you can apply to your investment strategy.

Not All Dividend Stocks Are Created Equal

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.

What is my investment strategy?

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.

Is General Dynamics a Good Stock To Own?

For some reason General Dynamics caught my eye. I looked at it through my criteria filter to see if it would fit within my investment strategy. The first thing I noticed that $GD was paying a very nice dividend payout of $4.40/share. How did this compare to the share price? The dividend yield is 3.03%, which is better than the industry average. So far so good. I wasn’t too happy with the share price of $144.62/share at the time I am writing this. Ten shares would cost me $1446.20 and yield me $44.00. This would give me another 0.30 shares of stock, if the share price remained the same for a year.

I also noticed that the stock was trading at around the mid-point of its 52 week range and the trend looks to be heading down. This stock may go down a bit more. Earnings look strong. As a matter of fact, the fundamentals for the company look very good. The stock looks like it would be a good one to invest in. But for me I’ll take a wait and see approach. I’ll wait to see if the stock price continues its downward journey and wait for a buying opportunity.

Seriously Considering Shares of Intel Corporation

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.

What’s more important, stock price or dividend yield?

The answer to the question will depend on your investing strategy and your goal. Speaking for myself, I prioritize on dividend yield with an eye on stock price. Regardless of either one, the stability and longevity of the company is paramount. I’m the type of person that would have missed out of Tesla when it first came out. I don’t speculate/gamble with my money. My goal is to create an income stream from my investment where I can stop working (I am overdue to officially retire and I still work because I have bills to pay). Now, in order to reach that goal my strategy is to invest heavily in dividend stocks (those stocks that pay you cash dividend periodically). If the company hasn’t paid any dividend consistently for 5 years, I’m just not going to seriously consider investing my money with them. Am I missing out on some tremendous windfall profit? Probably. But then I’m missing out on all those tremendous jackpots because I don’t go to casinos, either.
When I look at a stock or fund I look to see what they are paying and how often. I then look at the stock price and determine if the stock price is worth paying to get that dividend. Again, this is a subjective determination for me. I don’t believe that there’s a right or wrong answer. Two people can look at a stable company that has been in business for a long time (i.e. Coca Cola or Intel) and based on the criteria I used, one person can decide that the stock price is worth it while the other one feels that it isn’t. Their choices based on their goals, strategy, and comfort zones.

I’ve come across a few stocks/funds that someone said was a great investment based on the dividend yield. The last one I encountered was YYY (Amplify ETF TR High Income ETF). The stock price is cheap at approx. $15/share. The dividend yield is at 10.39%. Very high. In the relationship to the share price this comes out to about $1.56/share. So for $1500 you can buy about 100 shares of this ETF and get $156 in dividends. Sounds great? To me the one factor that makes me pause is the Expense Ratio (both Gross & Net). It’s at 2.17%. I like my expense ratios below 0.10%. This is a deal-breaker.

In addition to dividend yields & payouts, and price shares I’m looking at expense ratios. I don’t want to invest in a fund with high dividend yields that end up being eaten up by fees. The dividend history and growth are also important to me. What about share price? Well, it is important in determining how many shares I can buy and the future acquisition plans going forward. If the share price drops it’s an opportunity to buy more (barring that all other factors remain basically the same) shares and collect even more dividends. If it goes up than the value of my shares increases and I still get to collect dividends.

VHT vs. VGT; Adding a New Sector To My Portfolio

For those that follow my blog and my Twitter feeds, you are aware that my current portfolio is heavy with ETFs, About 82% of my investment portfolio consists of ETFs and the balance of 17% are individual company stocks. Within those ETFs I have the following areas invested in:

  1. Real Estate – VNQ (Vanguard Real Estate ETF).
  2. Energy – VDE (Vanguard Energy ETF)

The other 2 Vanguard funds are concentrated on high value & high dividends across many sectors (VFIAX & VYM).

I would like to add a healthcare ETF and a technology ETF to my portfolio. I am looking at VGT and VHT. Both are pricey by my standards but both are paying decent dividends, and that what I in this for. So, I now have to go through the decision process of which one do I invest in first. I will be investing in both but it’ll be completed over the next few months. I do have other expenses that I am obligated to handle first.

medical caduceus black white outline clipart

I looked at the data for VHT (Vanguard Health Care ETF) via my TD Ameritrade account. Currently the fund is trading at $204.84 per share which is a bit high for my purposes. In looking at this fund’s 52 week range you see that its share price is at the end of the high range. The chart shows the fund’s value is increasing so I doubt that the price will be dropping drastically, barring any unforeseen circumstances. But now for the key question. What about the dividends? VHT has an annualized payout of $2.55/share (a 1.24% yield). If the share price were to drop to the other end of the price spectrum of $138.11 the yield would then be 1.85%. The average 5 year dividend growth rate is 23.01%.

According to Morningstar the risk factor for this fund shows that it’s rated as Below Average and the returns are rated as Average. Both of which are a positive factor for me. Morningstar has the fund designated as a Large Blend fund. The one thing that I am not happy with for this fund is that the Net Expense Ratio is about 0.10%. This is the maximum I would prefer.

The market Return for the funds is 6.39% so far for 2020, For 2019 it was 21.86%. Some of the company stocks that are included in this fund are:

  1. JNJ – Johnson & Johnson
  2. UNH – UnitedHealth Group
  3. PFE – Pfizer Inc
  4. MRK – Merck & Co Inc
  5. ABT – Abbott Laboratories
  6. TMO – Thermo Fisher Scientific Inc
  7. ABBV – AbbVie Inc
  8. AMGN – Amgen Inc
  9. BMY – Bristol-Myers Squibb Co
  10. MDT – Medtronic PLC

cloud computing clipart

The other Vanguard fund that I checked out on TD Ameritrade was VGT (Vanguard Information Technology Index Fund ETF). This fund is another pricey one that is trading at its 52 week high range of $313.59, Morningstar has this fund rated Below Average risk and Above Average return. They also have it designated as a Large Growth fund.

In digging into the data for this fund I find that the dividend payout is annualized at $3.00/share (a 0.96% yield). In screening just for high paying dividend stock with a yield greater than 5%, this fund would not have shown up on my radar. But is still pays a decent dividend even if the share price makes it a challenge for the average person to purchase more than just a couple of shares. The Net Expense ratio is also at the maximum preferred ratio of 0.10%.

The returns for this fund for 2020 so far are 21.33%. For 2019 the returns were 48.61. Some of the company stocks that are included in this fund are:

  1. AAPL – Apple
  2. MSFT – Microsoft
  3. V – Visa
  4. MA – Mastercard
  5. NVDA – Nvidia
  6. PYPL – PayPal
  7. ADBE – Adobe
  8. INTC – Intel
  9. CSCO – Cisco
  10. CRM – Salesforce

I really like both of these funds but I can’t afford to buy both of them at this time. So, I have to make a decision which one I want to buy first. It comes down to 2 factors: a) share price, and b) dividend payout (after all, that’s what I’m interested in). They’re both pretty close in both of these areas.

The final decision at this time for me will be that I will be buying the funds in this order:

  1. VHT (Vanguard Health Care ETF)
  2. VGT (Vanguard Information Technology Index Fund ETF)