Dividend investing is like that “good job” your parents always wanted you to get. Sure it’s safe, has decent benefits, and it pays alright, but at what cost? How long do you have to work there to reap the benefits, and is it even worth it if you hate it?
Dividend investing is similar in the sense that yes, it can potentially provide some nice, definitively passive income, but it also presents itself with its own intrinsic pitfalls that accompany its benefits.
Let’s take a 1-minute survey course on dividends
A dividend is something a company pays out to its shareholders at predetermined intervals of time. This usually comes at the frequency of four times per year, quarterly, or in some cases semi-annually or annually. This can be in the form of cash, or it could come by way of more shares in the company too.
Companies pay a set dollar amount per share basis. If you own one share of AT&T, they will pay you $0.52 per quarter, per share owned. This makes their dividend yield about 6.8%, which is very high. Yield is calculated by dividing the annualized dividend payout by the current share price. (It’s actually about 7.17% as of April 13th, based on their current share price.)
Dividends, especially good ones, typically come from companies that have reached maturity and find themselves in established industries with predictable profits. Think oil & gas, banking, healthcare, utilities, etc. They’re beyond the growth phase where they reinvest heavily and take on expansion debt, and they reward investors for their equity.
So, what's a good dividend? In general terms, anything over 2% is considered to be a good dividend payout rate, but that’s also the broad average of the S&P 500, and as seen with AT&T, you can find much better than that if you’re a diehard dividends fan. IBM has a 5.3% yield, Realty Income, a REIT, offers 4.6%, and Walgreens is at 4.5% now, partially due to its recent price drop.
Considerations when dividend investing
Let’s be clear, dividend investing is not a strategy to produce investment income fast, or at all, unless you have a lot of cash, a lot of patience, or both. You would need to own 1,000 shares of that high yield AT&T stock to produce $2,000 a year in dividend income. That’s a $29,000 investment, so it would take you 15 years to make your money back at present value.
Dividend investing is not for the faint of heart, the light of accounts or the impatient. Despite this though, that doesn’t mean that over time by investing money you don’t need, you couldn’t build up a nice supplementary income. If you were able to spread a few hundred thousand dollars of retirement funds across multiple well-paying dividend stocks, this could become a viable option.
But don't forget that the stock price is still relevant. A dividend stock is something you want to be able to ease into overtime, and eventually, sink a lot of funds into something that can make your dividend payouts amount to something relevant. You don’t want to have to concern yourself with market fluctuations and a volatile stock price.
Picking a dividend stock that’s presently overvalued or just doesn’t forecast well for the long-term future can be a risky play. Sure you may be getting a great dividend payout, but if your principal investment value is melting faster than the ice caps because the market is becoming speculative of the business or the industry it’s in, then you’ve just negated the point of dividend investing.
This is why it’s important to pick well-established businesses with a long-term outlook. A dividend stock that can not only create income but preserve the value of or even potentially grow the principal investment amount is the ultimate goal here.
So is it worth it?
Whether or not dividend investing is worth it depends on your financial goals, risk tolerance, and more. Got a lot of cash on the sidelines and want some truly passive income? This is for you. Need some money quickly? Looking for an undervalued growth stock? Steer clear, there are other investment strategies for you.
💡 If you are looking for high-dividend investments, but you don't want to pick individual stocks, take a look at high-yield ETFs. Just keep in mind that high yield ≠ high return.
📊 Wondering what are the key dividend strategies and how their returns stack up? Take a look at Finnyvest's dividend strategy scanner. It will teach you a thing or two.