Welcome to our Ultimate Dividend Investing Guide! Here we will unlock the doors to sustainable wealth creation through the art and science of dividend investing. In the ever-evolving landscape of finance, dividend investing stands as a beacon of stability and growth. But this guide isn’t just about picking any dividend-paying stock; it’s about mastering the strategies. It helps you understand the nuances and the hidden gems that can supercharge your portfolio. Whether you’re a novice investor or a seasoned pro, join us on this Dividend Investing adventure.
Dividend investing is a strategic approach aimed at cultivating a consistent stream of passive income through dividend payouts. Investors pursuing this strategy are commonly referred to as income investors. Frequently, individuals inquire about the top dividend stocks, high dividend stocks, and even monthly dividend stocks. These inquiries are crucial for informed decision-making. Let’s explore further!
How I came to be Dividend Investor
It’s no secret that Dividend Investing is not just my preferred strategy; it’s my passion and expertise. You’ll find me on Twitter as Dr. Dividend. While I may not hold a PhD in the field, I’ve invested countless hours studying the intricacies of dividend investing.
Humble Beginnings
My journey began in Indiana, where financial struggle was a consistent them during my childhood. I was raised by hardworking parents—a plumber and a janitor. Money was always tight, and budgeting was something my parents rarely accomplished. I watched as my Dad worked long arduous hours, only to have ends barely meet. This left an undeniable mark on me. Stacks of bills and late notices were a constant reminder of the uphill battle my family faced everyday. The realization hit hard: without a change, I risked repeating the same cycle. Retirement seemed like a distant dream. Social Security payments were the only beacon of hope after decades of exhausting labor. But I refused to succumb to that fate. It was time to shatter the status quo. Through dividend investing, I’m started breaking free from the cycle of endless toil and uncertain futures.
The Early Years…
Fast forward to 2007 when I enlisted in the Navy. Like many young recruits, I was handed paperwork to sign up for the “Thrift Savings Plan” (TSP). At the time, I didn’t fully grasp its significance beyond the notion of allocating money toward a retirement account. Retirement was a distant goal, but one worth planning for.
It wasn’t until I hit 25 that I experienced a pivotal moment of awakening. I found myself plunging headfirst into the realms of investing and financial literacy. The realization hit hard: despite years of schooling, I was ill-prepared for the realities of managing my own finances. Armed with determination, I set two ambitious goals for myself: early retirement and relentless self-education.
Where am I now?
Currently, I’m on track to achieve my retirement aspirations by the age of 45. While it’s a commendable feat, think how far I’d be if had started my financial journey earlier. But here’s the crucial truth: it’s never too late, and no investment is too small to make a difference. Let’s dispel those misconceptions right now.
For the past 16 years, I’ve served in the military as a Financial Specialist. In this role, I’ve undergone specialized training and provided recurring education to countless service members at my Command. I’ve taught everything from budgeting to home buying, car purchasing to investing. During this time I’ve had the privilege of equipping thousands of individuals with the knowledge and tools they need.
Now, it’s your turn to embark on your investing journey. Take the first step by exploring my dividend stock tutorial below, and let’s set sail towards financial freedom together!
Happy Investing!
What is dividend investing?
Dividend growth investing is an investment strategy that seeks to invest in companies with high-quality dividends. Dividends are payments made by a company to its shareholders, usually on an annual basis or quarterly basis. Dividend growth investing does not require active trading or any timing of entry and exit points; it’s all about the long game! The goal is to build a passive income stream from dividends that you can use during retirement.
How is Dividend Investing different?
Typical long-term investing strategies often involve selling portions of your portfolio periodically to sustain yourself during retirement. This approach usually entails selling 3-4% of your portfolio each year to cover living expenses. However, what if the market experiences a significant downturn? This is where dividend investing comes into play.
With dividend investing, you can address this concern effectively. Instead of relying solely on selling shares, you can potentially earn a consistent 3-4% yield annually without ever having to sell a single share. Just imagine constructing a portfolio designed to last a lifetime by accumulating dividend earnings over time. What’s more, this passive income stream could extend beyond your own lifetime, benefiting your children and potentially creating generational wealth.
Now, let’s delve into the fundamentals: What exactly is a dividend, or what is a stock dividend?
A dividend is a portion of a company’s earnings that is distributed to its shareholders as a reward for their investment. It’s typically paid out regularly, often quarterly, and is a way for companies to share their profits directly with their investors. On the other hand, a stock dividend refers to the distribution of additional shares of stock to existing shareholders, typically as a percentage of their current holdings. Both dividends and stock dividends can provide investors with a steady stream of income and contribute to the overall return on investment.
Dividends are cash payments that a company makes to shareholders. They are passing their profit on to you in the form of dividend payments.
How to get paid dividends from stocks?
Getting paid dividends from a dividend paying stock is simple. You need to be the owner of the stock prior to the ex-dividend date. As long as you own the stock by that date you will receive the dividend. Companies announce their dividends and when they do they also provide an ex-dividend date.
How often are dividends paid? How often do companies pay dividends?
Dividends can be paid twice a year, quarterly, or even monthly. Companies pay out dividends ranging from $0.10 to $6 per share or more. You aim to collect these dividends as a dividend growth investor in order to build a passive income stream for retirement use.
Do all stocks pay dividends to investors?
No, check out below on how to determine if your chosen stock pays a dividend.
How to tell if a stock pays dividends?
Determining if a stock or company you are interested in pays dividends takes some research. The first place I check is Dividend.com to see if they have information on their dividend. For example, here is their page on Apple’s Dividend. This is a good first stop to see information like dividend yield, number of years that a company has been paying a dividend, or to see historical dividend payments. You can also look at a companies investor relations page on their website to see if they have information about dividends as well. Here is Apple’s investor relations page that show their dividend history.
Why should you buy dividends stocks?
Are dividend stocks worth it?
Historically, dividends have played a pivotal role in driving the total return that stock market investors receive. An illustrative study by Hartford Funds underscores this significance, revealing that dividends contributed a remarkable 84% of the S&P 500’s total return over the past four decades. This statistic underscores the crucial role dividends play in bolstering investors’ portfolios.
Why are dividends so crucial? Simply put, they represent a share of a company’s earnings that are distributed to its shareholders. For dividend growth investors, this steady stream of income is highly valued, especially as they plan for retirement and seek to cover their expenses.
But here’s where dividends truly shine: reinvestment.
Reinvesting dividends allows investors to harness the power of compounding. By strategically reinvesting dividends back into more shares of the same stock or other dividend-paying stocks, investors engage in Dollar Cost Averaging (DCA), acquiring shares at varying prices over time. This approach smooths out market fluctuations and can lead to larger payouts down the road. Dollar cost averaging, often hailed as the king of investment strategies, ensures that investors sometimes buy low and sometimes buy high, ultimately averaging out the stock’s purchase price. The result? A potentially significantly larger portfolio value than if dividends were used vice reinvested.
Reinvesting dividends stands as a cornerstone of dividend growth investing. It’s this practice that enables investors to construct ever-growing streams of income, fueling their financial goals and aspirations for the long term.
Dividend Growers and Initiators
The graphic below vividly illustrates the outperformance of dividend growers and initiators compared to the S&P 500 index. Over time, these dividend-focused investments have demonstrated slightly superior returns coupled with lower volatility.
Specifically, dividend growers and initiators have delivered an impressive annualized return of 13.20%, surpassing the S&P 500 index’s return of 12.57%. Moreover, their standard deviation, a measure of volatility, stands at 12.57%, indicating relatively less fluctuation in comparison to the broader market index.
This data underscores the attractiveness of dividend-focused strategies for investors seeking both growth and stability in their portfolios. By prioritizing companies with a track record of increasing or initiating dividends, investors may potentially benefit from enhanced returns while mitigating the risks associated with market volatility.
The Power of Compounding Performance
While the variance in returns between dividend growers and initiators compared to the S&P 500 may not seem substantial on the surface, the impact over the long term is indeed noteworthy. In fact, this seemingly small difference translates into a significant disparity in capital appreciation.
To put it into perspective, consider this: over the period from 1973 to 2020, for every $100 invested, the variance in returns equates to a substantial difference of $7,582 in capital appreciation. This illustrates the profound effect that even slight disparities in returns can have on investment outcomes over extended periods.
Therefore, while the variance in returns may not appear striking at first glance, the cumulative effect over decades of investing underscores the importance of carefully considering investment strategies that prioritize consistent growth and stability, such as dividend-focused approaches.
It’s safe to say that dividends are an important to the power of the stock to generate strong returns over time. But, what are the advantages and disadvantages of dividend investing? In the next section we’ll take a look at that.
Dividend Investing Advantages and Dividend Investing Disadvantages
Income Investing Disadvantages:
- Dividends are not always guaranteed. In 2020, there were dozens of companies that cut their dividends due to financial pressure. At any moment, companies can decrease their dividend payout or completely get rid of it. However, many of the companies on the Dividend lists maintained and even increased their dividends during this time. This highlights the importance of investing in quality companies.
- Dividends are taxable if held in a taxable brokerage account. Depending on the type of dividend received (Ordinary, Qualified, or Special) the tax amount is different.
- When compared to index investing dividend investing could decrease diversification since you’re really only invested into “large cap” stocks. You’ll be missing out on the mid-cap and small-cap stocks. This can be overcome by investing in various ETFs.
- You have to pay attention to the companies you are investing into to ensure they remain healthy and can continue to grow and increase their dividend.
- Yield Traps or High dividend yields can sometimes signal underlying issues with a company, such as financial distress or unsustainable payout ratios, leading investors into value traps.
- Limited Growth Potential: Companies that prioritize paying dividends may reinvest less capital into growth initiatives, potentially limiting their long-term growth prospects.
Income Investing Advantages:
- Reinvesting dividends during sideways moving markets, bear markets, and corrections, purchases more shares with the dividends while the prices are lower.
- Historically dividends have provided 41% of the S&P 500 total return across the last eight decades.
- Creating passive income without having to sell you underlying capital. That capital will continue to grow as companies raise their dividend. Your passive income could grow even if the underlying asset has decreased in value due to a price drop or bear market. You don’t need to worry about selling shares in retirement if the stock market falls as long as the dividend remains intact.
- The psychological effect of dividends when there is a market downturn. Continuing to see your dividends growing and posting to your account boosts confidence during market volatility. During 2022 the market fell around 18% across the board while my dividends increased by 12% during the same time. Seeing those payments kept my motivated.
- Historical Performance shows dividend-paying stocks have demonstrated resilience during market downturns and provided competitive returns over the long term.
- Inflation Hedge with increasing Dividend payouts. Dividend income has the potential to keep pace or even beat inflation, providing a hedge against rising prices and preserving the purchasing power power of your passive income over time
Dividend Growth Investing Goals
- Build a Resilient Portfolio Foundation: Prioritize dividend-paying stocks known for their stability and ability to weather market fluctuations.
- Cultivate Sustainable Income Streams: Target companies with a consistent track record of increasing dividends, aiming to create reliable income streams that grow over time.
- Foster Long-Term Wealth Growth: Invest in firms with strong fundamentals and growth potential, leveraging dividend reinvestment to compound returns and build wealth over the years.
- Mitigate Risk Through Diversification: Spread investments across various sectors and industries to reduce risk exposure and enhance portfolio resilience.
- Preserve Purchasing Power: Select stocks with dividend growth rates that outpace inflation, safeguarding the purchasing power of your investment income.
- Emphasize Quality Over Yield: Prioritize quality companies with strong financial health and sustainable dividend policies, rather than chasing high yields that may be unsustainable.
- Promote Discipline in Portfolio Management: Maintain a disciplined approach to monitoring and managing your portfolio, regularly reviewing holdings and making adjustments as needed.
- Focus on Total Return: Strive for a balance between dividend income and capital appreciation, aiming for overall portfolio growth over the long term.
- Harness the Power of Compounding: Reinvest dividends to take advantage of compounding, allowing your investment to grow exponentially over time.
- Align Investments with Financial Goals: Tailor your investment strategy to align with your financial objectives, whether it’s funding retirement, achieving financial independence, or building generational wealth.
By adhering to these goals, investors can construct a dividend growth investment strategy that not only generates steady income but also fosters long-term wealth accumulation and financial security. In the next section, we’ll take a look at common dividend investing terms you should know starting out!
Dividend Investing Terms
Dividends that are paid out in cash directly to the owners brokerage account. Cash dividends are the most common.
Date that dividend is announced.
Companies that have been growing their dividends for 25+ years. Here is a list of dividend aristocrats.
Companies that have been growing their dividends for 5+ years. Here is a list of dividend challengers.
Companies that have been growing their dividends for 10-24 years. Here is a list of dividend contenders.
Companies that have been growing their dividends for 50+ years. Here is a list of dividend king
The percentage of the share price that is paid as a dividend is calculated using dividend yield. The formula to calculate how much your investment will be pay is:
How to calculate for dividend yield:
Dividend yield is calculated using the current stock price and the current annual dividend. JNJ’s stock currently sells for $179.44. It also pays a quarterly dividend of $1.06 or $4.24 per year. The formulas for the example are below:
Annual Dividend / Current Stock Price = Dividend Yield
$4.24 / $179.44 = .0236 (or 2.36%)
Companies sometimes continue to raise their dividend after you purchase shares. For example, the Dividend Aristocrats is a list of companies that have been paying and raising dividends for at least 25 years. How this factors in for you is what is known as yield on cost.
How to Calculate how much you investment will pay in annual dividends?
Investment Amount X Dividend Yield = Annual Dividends (Passive Income)
For example if you invest $10,000 into Johnson and Johnson ($JNJ), which yields around 2.39% as of this writing, you would get paid $239 a year. This would equate to $19.91 per month. This would continue to grow if JNJ continued to raise their dividend, which they’ve done for 59 years straight! Here’s the formula using our example:
$10,000 X .0239 = $239
You can use a variation of the same formula to calculate how much you would need to invest to earn a particular amount in passive income. For example, if you wanted to earn $24,000 in passive income a year, how much would you need to invest?
How to calculate investment for dividends:
Annual Dividends (Passive Income) / Dividend Yield = Investment Amount Required
Using the JNJ example above and our example that we wanted to earn $24,000 we would need to invest $1,004,184. Here’s the formula using our example:
$24,000 / .0239 = $1,004,184
These are programs offered by most brokerages to reinvest you dividends automatically to buy more share or fractional shares of the company that paid the dividend. These were widely popular when brokerages had commissions on stock purchases and their DRIPs didn’t charge a commission when reinvesting. Most brokerages today have commission free trading so enabling DRIP is a personal investor choice. You can easily purchase shares of your choice with your dividends if you choose not to use DRIP.
The first day that new buyers are not eligible to receive a dividend. Investors must own the stock by that date to receive the dividend. Those who purchase the stock after the ex-dividend date will not be eligible to receive the dividend. If you choose to sell the stock after the ex-dividend date are still entitled to receive the dividend, because they owned the shares as of the ex-dividend date.
Dividends that are taxed as ordinary income at the federal tax level. Check out our in depth guide to taxes to learn more!
Date a dividend is deposited into your brokerage account.
These dividends are treated as long range capital gains and therefore taxed at a much lower rate than ordinary dividends. A majority of dividends fall into this category. Check out our in depth guide on taxes to learn more!
The official owner on this date gets the dividend. It takes three business days from purchase to be the owner of record. Thus, you would not collect the dividend if you purchased two days before the owner of record date. In other words, the ex-dividend date (date not eligible to collect dividend) is two business days before the “owner of record” date.
These are dividends that are not paid on a routine basis and are normally higher than the average dividend. Special dividend can be paid at any time if the company has extra cash they wish to return to shareholders. The nature of these dividends is unpredictable and shouldn’t be relied on as part of your passive income.
Yield on cost is the dividend yield based on the current cost of your shares in your portfolio. You can calculate yield on cost using the above formula but you use your cost (cost basis) in place of the current stock price. Yield on cost can increase your passive income considerably over 10-40 years of investing.
Annual Dividend / Cost Per Share (Cost Basis) = Yield on Cost
Warren Buffet invested in Coca-Cola in 1988 and his company owns around 400 millions shares which is $1.299 billion. His yield on cost in 2021 is 52%!
Confused about some of the formulas we used above?
DOWNLOAD OUR FREE DIVIDEND CALCULATOR
In the next section, we’ll take a look at using DRIP, when to sell, and strategically rebalancing your dividend portfolio.
How to use Dividend Reinvestment Plans (DRIP)
Dividend reinvestment plans (DRIPs) offer a convenient way to automatically reinvest your dividends back into purchasing more shares of the same stock. While some investors may wonder if DRIPs are suitable for them, it’s essential to weigh the pros and cons.
Traditionally, DRIPs were popular due to the high costs associated with buying individual stocks. However, with many brokerage firms now offering commission-free trading, this advantage is less significant. Nonetheless, DRIPs can still be beneficial for investors who prefer the ease of automatically reinvesting dividends without additional fees.
For those concerned about forgetting to reinvest dividends, DRIP automation provides a solution. By setting up DRIP automation, dividends are reinvested without the need for manual intervention. It’s a hands-off approach that ensures your investment continues to grow over time.
However, the decision to use DRIPs ultimately depends on your personal preferences and financial goals. Some investors may opt to reinvest dividends manually, especially if they prefer more control over their investment decisions. Additionally, there may come a point where you want to start relying on dividend income. Making manual reinvestment or redirecting dividends to other investments more appealing.
Uncover the Astonishing Secrets of DRIP and How it can Skyrocket Your Wealth Beyond Belief! Dive into our explosive article on capitalizing with DRIP stocks NOW!
How I use DRIP stocks
In my own experience, I utilized DRIPs during my time in the military. I appreciated the reliability it offered amidst uncertain internet connectivity. As my dividend income grew, I selectively turned off DRIPs for certain stocks once they reached a threshold. I continued to reinvest dividends for others. This approach allowed me to tailor my investment strategy to my evolving financial needs and preferences.
Ultimately, whether you choose to utilize DRIPs and how you use them is entirely up to you. Whether you prefer the convenience of automated reinvestment or the control of manual reinvestment, the key is to ensure that your investment strategy aligns with your long-term financial objectives.
When should I sell a stock or shares of a position?
Each company I invest in I plan to hold for as long a possible. I analyze the company and their performance metrics prior to investing. Each company added to my portfolio serves a purpose. A lot of new income investors will see their initial investment grow by 10% or more and wonder, should I sell? The key to long term growth is to hold these dividend companies for decades as the dividends grow. Selling when the price appreciates will lock in your gains but will also decrease your overall passive income. The goal is to hold these shares are the company increases dividends over time; ultimately increasing you passive income.
Here are the reasons I sell shares:
- The investment no longer matches the reason I added it to my portfolio
- The dividend is cut or eliminated
- The investment consistently underperforms
- The metrics I use to evaluate the company indicates the dividend is at risk
- The position has gotten to large or I want to rebalance
A systematic approach to managing your investment portfolio exemplifies a strategic mindset geared towards maximizing returns while mitigating risks. Let’s delve deeper into the various criteria guiding your decision-making process when it comes to selling shares:
- Mismatch with Portfolio Strategy: Your investment philosophy revolves around the notion that every stock in your portfolio serves a distinct purpose. Whether it’s targeting dividend yield, growth potential, income generation, or sector diversification, each investment must align with your overarching investment goals and strategy. This deliberate approach ensures that every addition to your portfolio contributes meaningfully to its overall objectives.
- Dividend Cut or Elimination: As an investor focused on building a passive income stream for early retirement, the reliability of dividend payments is paramount. Therefore, the occurrence of a dividend cut or elimination can have significant implications for your investment thesis. While such events may trigger a reassessment of the affected position, you also recognize the importance of considering the context surrounding the dividend action. For instance, the temporary suspension of dividends by companies like Disney during unprecedented times, such as the COVID-19 pandemic, may warrant a deeper evaluation of the situation before making the decision to sell.
- Consistent Underperformance: Monitoring the performance of your investments is a fundamental aspect of your portfolio management strategy. Assets that consistently underperform the broader market may raise concerns about their long-term viability within your portfolio. However, you have to acknowledge the inherent challenge of distinguishing between short-term fluctuations and genuine underperformance. I experienced this with Nike, I sold them after holding them for over a year when their stock price failed to appreciate. What happened next? Their stock price increased 12% the following month; OF COURSE! This underscores the importance of exercising patience and avoiding impulsive decisions based solely on recent performance metrics.
- Indicators of Dividend Risk: Rigorous analysis of key financial metrics forms the backbone of your investment evaluation process. By regularly assessing factors such as dividend payout ratio, free cash flow, and profit margin, you gain valuable insights into the health and sustainability of your investments. This proactive approach empowers you to identify potential red flags early on and take appropriate action to mitigate risks to your dividend income.
- Portfolio Rebalancing: Maintaining a balanced portfolio is essential for managing risk and optimizing returns over the long term. When a position becomes disproportionately large or deviates significantly from your target allocation, you may opt to rebalance your portfolio by selling shares. However, you need to exercise caution to avoid the pitfalls of selling high-performing assets prematurely and carefully consider the potential tax implications of such transactions.
By adhering to these comprehensive criteria and continuously refining your investment strategy, you demonstrate a commitment to prudent portfolio management and the pursuit of your financial objectives. Your thoughtful and disciplined approach serves as a testament to the importance of thorough research, strategic planning, and a long-term perspective in the realm of dividend investing.
How to rebalance your portfolio?
Diversification is a cornerstone of long-term investment success, serving as a shield against the unpredictable nature of financial markets. While it’s tempting to chase after the next big winner, the reality is that thousands of investors fail to pick the right company each year. This underscores the importance of maintaining a balanced portfolio composed of a diverse array of assets.
Why is diversification crucial?
Simply put, different companies and sectors exhibit varying growth rates and levels of volatility over time. While some may experience rapid growth, others may lag behind or even face downturns. It’s a natural part of market dynamics for your portfolio to drift from its intended balance over time. To counteract this tendency, it’s essential to assign goal percentages to each stock or exchange-traded fund (ETF) in your portfolio based on your investment objectives and risk tolerance.
Rebalancing your portfolio involves periodically adjusting your holdings to bring them back in line with your target allocations. The frequency of rebalancing is a personal decision, and as the investor, you have the flexibility to determine the most suitable approach for your financial goals and circumstances.
Below is a snapshot of my portfolio as of December 2022, illustrating both the current allocation and my target goals for each holding:
When it comes to rebalancing your portfolio, there are two primary methods: the Sell/Buy Method and the Targeted Investment Strategy. Each approach offers distinct advantages and considerations, allowing you to tailor your rebalancing efforts to align with your investment preferences and goals.
Sell/Buy Method:
The Sell/Buy Method involves selling shares from positions that have appreciated in value and reinvesting the proceeds into assets that require funding to reach your target allocation. While this method can effectively realign your portfolio, it comes with certain drawbacks. Selling shares triggers taxable events within your portfolio, as any capital gains realized from the sale are subject to taxation. Additionally, selling assets often means parting ways with some of your most successful investments. To mitigate tax obligations, consider selling stocks held for over a year to qualify for the lower long-term capital gains tax rates. You can implement this method on a regular schedule, such as every four weeks, semi-annually, or annually, depending on your preference.
Targeted Investment Strategy:
The Targeted Investment Strategy involves depositing funds regularly to purchase new shares for your portfolio without selling existing assets. Instead of selling shares, you use the additional cash to buy assets that are below your target allocation. For example, if a particular stock’s percentage in your portfolio falls below your desired allocation, you allocate funds to purchase additional shares of that stock. This strategy avoids triggering taxable events and allows you to gradually rebalance your portfolio over time through new investments. This is my preferred method of strategically rebalancing my portfolio. You can also turn off DRIP temporarily to funnel those dividends into the holding of your choice to help with rebalancing.
Target what’s best for you!
It’s important to note that you’re not bound to your target allocation and can adjust it as needed based on market conditions and investment opportunities. For instance, if you identify an attractive investment opportunity, you may temporarily deviate from your target allocation to capitalize on it. Likewise, you can employ a combination of the Sell/Buy Method and the Targeted Investment Strategy to rebalance your portfolio according to your evolving needs and preferences.
In summary, both the Sell/Buy Method and the Targeted Investment Strategy offer effective approaches to rebalancing your portfolio, allowing you to maintain a diversified and optimized investment portfolio over the long term. Choose the method that best aligns with your financial objectives, risk tolerance, and tax considerations to achieve your investment goals with confidence.
In the next section we’ll take a look at three example portfolios. These examples are here to help you understand the differences that performance, dividends, and more could make on your portfolio.
How to make a dividend portfolio?
In this section, we will examine several example portfolios and compare their performance to that of the S&P 500 index. We will focus on a selection of dividend exchange-traded funds (ETFs) in response to the commonly asked question, “What’s the best dividend ETF?” These portfolios are built on a foundation of ETFs with low expense ratios and proven track records. However, it’s important to note that past performance does not guarantee future results.
The primary objective of these portfolios is to achieve a balance of diversity, growth, and dividends. By investing in dividend ETFs, beginners can initiate their dividend investment journey and put their money to work for them while gaining valuable insights into the stock market. These ETFs provide a straightforward approach to investing, allowing individuals to start building wealth as they continue to learn and refine their investment strategies.
Once investors gain a deeper understanding of stock selection and portfolio management, they may choose to expand their investment horizons or continue utilizing these portfolios as a foundation for their investment approach. By striking a balance between diversification, growth potential, and dividend income, these example portfolios offer a solid starting point for investors at any level of experience.
The three portfolios consist of the following:
Portfolio #1 – 100% SCHD (A favorite ETF among Dividend Investors)
Portfolio #2 – 50% SCHD / 50% NOBL (NOBL is another strong dividend ETF centered around Dividend Aristocrats)
Portfolio #3 – 100% VOO (Used as a performance benchmark)
Performance:
From the backtesting results, it’s evident that the performance of each portfolio is closely intertwined. However, during the observed time period, both Portfolio #1 and #2 outperformed the S&P 500 benchmark. It’s important to note that this outcome may not always hold true, as market conditions and other factors can influence portfolio performance over time.
Income:
For dividend investors aiming to generate income to sustain their lifestyle, the focus shifts towards evaluating the income generated by each portfolio. In this regard, Portfolio #1 stands out by generating significantly more income compared to Portfolio #3. This discrepancy can be attributed to the dividend yield of each portfolio.
Achieving a balanced dividend yield of around 3-4% is often considered a good starting point for new investors. This balance ensures a reasonable level of income generation while maintaining exposure to potential growth opportunities within the portfolio. By striking this balance, investors can establish a solid foundation for their dividend investment strategy, with the goal of eventually relying on dividend income to support their financial needs.
Therefore, while portfolio performance is important, particularly in comparison to benchmark indices like the S&P 500, dividend investors should prioritize assessing the income generated by their portfolios. This income-centric approach ensures that investments are aligned with long-term financial goals, such as achieving financial independence through dividend income.
If you want to learn more about the ETF SCHD, check it out here!
If you want to learn more about the ETF NOBL, check it out here!
Want to back test your own portfolio? Use Portfolio Visualizer here!
In conclusion, dividend investing offers a powerful strategy for building wealth, generating passive income, and achieving financial independence. Throughout this comprehensive guide, we’ve explored the fundamentals of dividend investing, including the benefits, strategies, and considerations for success.
As you embark on your dividend investment journey, remember to prioritize a balanced approach that combines growth potential with consistent income generation. Whether you’re a novice investor just starting out or a seasoned veteran seeking to optimize your portfolio, the principles of dividend investing provide a solid framework for achieving your financial goals.
To stay updated on the latest insights, tips, and strategies in the world of dividend investing, be sure to follow me on Twitter at [@Dividend_Dr]. Join our community of like-minded investors and engage in discussions, ask questions, and learn from each other’s experiences.
Thank you for joining me on this journey towards financial empowerment through dividend investing. Here’s to your success and prosperity in the world of dividends!