Dividend Investing
Dividend stocks pay you a share of profits, usually every quarter. Reinvested over years, those payments can grow into a large part of your total return and, eventually, a steady income.
The 5 numbers to check
| Metric | What looks healthy |
|---|---|
| Dividend yield | 2–5% for most quality companies. Much higher can be a warning sign. |
| Payout ratio | Under 60% leaves room to keep paying in a bad year. REITs and utilities run higher by design. |
| Dividend growth rate | 5%+ a year beats inflation and compounds your income. |
| Free cash flow cover | Above 1.5× means the dividend is paid from real cash, not borrowing. |
| Years of increases | 10+ years shows a commitment that survives recessions. |
The four dividend dates
Declaration date: The board announces the dividend amount and the other dates.
Ex-dividend date: You must own the shares before this date to receive the dividend. The price usually drops by about the dividend amount at the open.
Record date: The company checks its records for eligible shareholders, usually one business day after the ex-date.
Payment date: The cash lands in your brokerage account.
The power of reinvesting (DRIP)
$10,000 at a 4% yield, dividend growing 6% a year, all dividends reinvested, share price held flat.
| Year | Portfolio value | Yearly income |
|---|---|---|
| 1 | $10,400 | $400 |
| 5 | $12,467 | $599 |
| 10 | $16,711 | $1,058 |
| 15 | $24,638 | $2,043 |
| 20 | $41,151 | $4,443 |
Illustrative only, before taxes. Real prices and dividends vary.
Dividend aristocrats & kings
Dividend aristocrats are S&P 500 companies that have raised their dividend for at least 25 consecutive years. Dividend kings have done it for 50+ years.
Long-time examples include Coca-Cola (KO), Procter & Gamble (PG) and Johnson & Johnson (JNJ). A long record doesn't guarantee the future, but it shows a dividend culture that has survived several recessions.
Avoid the yield trap
- A yield far above peers often means the price has fallen because the market expects a cut.
- A payout ratio over 100% means the company is paying out more than it earns.
- Rising debt used to fund the dividend is not sustainable.
- A shrinking business can't keep growing its dividend, however generous it is today.
Find dividend stocks and model your income:
Educational information only, not investment advice. Market data may be delayed.
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