Tag Archives: stock selection

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.

Why I Never Recommend Stocks To Buy

I’ve only been investing a short time but as I’ve been trying to learn what I can about dividend investing, I’ve been coming across many posts and tweets regarding what stocks to buy. What I haven’t seen is how to decide which stocks to buy. It would go a long way if those that post stock recommendations would also give an explanation on how and why they come to recommend that specific stock. There’s an old saying:

Those people posting their stock recommendations without any explanation or method of how they got there are giving out a “fish”. Some people will blindly follow but never know why. Their only reason for selecting that particular stock is that “someone recommended it”. Hmm. How does that help you go forward? How can you move forward to deciding which stocks to invest in next? How well do you know the person giving the recommendation? What is the recommender’s agenda? Lots of questions come to mind.

We also have those that recommend lists of stocks to watch. Watch for what? What are we supposed to look for? Why should we be watching these stocks? Again, what is the poster’s agenda? When I get recommendations from my broker/financial advisor, they are based on my financial goals and broad selection criteria. Without an explanation of how they came to recommend these specific stocks you could miss some opportunities because you may not be looking at the same things that they are because their strategy is different than yours.

But if you give people the methodology of how you came to recommend these stocks you now are at the point of “teaching to fish”. Because now they can try to replicate your steps and maybe modify them to their strategy and decide on their own which stocks to buy. Telling me to buy a specific stock because it pays extremely high dividends is not useful by itself. There is more to my strategy than just dividends paid out. I’m not a one dimension investor.

Whenever I see the stock recommendation postings I always wonder “What is the poster’s agenda?” What are they after? I won’t recommend stocks. I will, however, detail a decision that I made about a specific stock or between 2 different stocks. I’ll explain what I looked at and what data was important to me and how my decision falls within my investment strategy.