When it comes to investing, there is no one correct route which you can take to get to the desired results. However, there are certain strategies you can apply so that you end up with very handsome capital gains. Upon asking for advice from more experienced traders or a broker, you might receive different answers. That’s because an investment strategy is somewhat personal. It depends very much on the results you want to have. Therefore, here are 7 dividend investing strategies that actually work, ready for you to choose from, after careful consideration.
#1. The Alpha-Active Investor Strategy
An active investor is a person who elects to get more involved in the selling and buying of securities. It’s an investment strategy in itself, through which traders believe they can manage their money and beat the stock market return at the same time. You can invest in either mutual funds or individual stocks.
You will often see active investors talking about their “alpha”. This actually means the amount of money by which they have underperformed or exceeded their original benchmark index. Let’s look at an example. If you invest in American stocks, you will most likely use the S&P 500 index as your preferred benchmark. If the index goes up 10% over a certain period of time and your personal portfolio as an investor or shareholder goes up by 15%, then your alpha is +5. Therefore, alpha is actually the sum by which you return beats or lag an index that has a similar profile.
In laymen’s terms, investors dream of beating the index. It’s natural to want to exceed it rather than trying to match it all the time. So, what’s the catch? Beta investors, who are described below, state that very few investors actually manage to beat the index. Like this, it’s not worth trying as a strategy.
#2. The Beta Dividend Investing Strategy
The term ‘beta’ refers to the degree to which a certain portfolio or individual investment is relatively volatile in reference to its benchmark index. If a fund has a beta coefficient of 1, that means it will shift with the market. Less than 1 means it will be steadier than the market and more than 1 means it will be more volatile than the market itself.
Unlike alpha investors who are active, beta investors usually adopt the ‘passive’ strategy. As stated above, they don’t actually believe you can exceed your index, so they don’t look to outperform the market. They actually want to join the market as much as possible. They accept returns that absolutely match the index. The reason is simple. They believe that, as the market shifts over a period of, let’s say, a lifetime, so will their indexes. An index usually grows, indeed, so their fixed returns will grow over time. It’s a good and safe strategy to follow as far as investment goes, albeit a long and monotonous one.
#3. Avoiding the Highest-yielding Stocks and Funds in Dividend Growth Investing
You can calculate a stock’s yield by dividing the dividend rate per annum by the current share price. When you have found it out, it can tell you quite a lot about the risks you run in the following years. There are certain companies on the market, such as telecom, utility and consumer-staples ones that do pay high yields. They can be somewhere around 3% or 5% above the high-quality yields. There are some funds as well, like real-estate investment trusts that yield 4% or more. But there is a caveat. First of all, these companies, because of their line of business, are risky. And, second of all, the market looks at these high yields differently. It sees them as proxies for bonds. This means that, if they continue to rise, so will bonds. This means that investors will be lured away from dividends to bonds. The end result will be that these particular equities will fall out of favor.
#4. Accepting Lower Yields from Companies Expected to up their Dividends in Time
There is a list of companies that have upped their dividends over very long periods of time. These are the Dividend Aristocrats and the Dividend Kings. The former represents an index comprising all the companies that have managed to pay ever growing dividends for 25 or more consecutive years. The latter represents an index of companies that have managed to do the same thing but for 50 or more consecutive years. The Aristocrats represent some 50 companies, while the Kings are represented by solely 17. Some examples of companies that have made both lists are Coca-Cola, Procter & Gamble Co., and Walgreen Co.
This strategy means that you, as an investor or shareholder, have to accept their low yields, which usually come to 1.5% or 2.5%, all the while understanding they will rise over time. It’s a bit like what the beta investors do, as far as logistics go. The good thing about this strategy is that the annual dividend growth these mammoth companies offer, significantly beats inflation. Apart from that, their stocks have a very high potential of price appreciation. It’s also what they call a “safe bet”, because, if these companies have managed to return dividends to their shareholders for the past 50 years, they are most likely not to stop now.
You can look for the best dividend investment strategies using online tools, such as AAII Dividend Investing.
#5. Watching Fund Expenses that Are Deducted before the Distribution of Dividends
Yields are inverse to prices. This is why, in the past few years, as there was a higher demand for stocks with high dividend returns, their yields dropped. Actually, the common percentage as far as yields go nowadays is 3%. This isn’t a lot of money in the first place. Apart from that, it doesn’t help either that most of the mutual funds that are actively managed charge you a whole percentage point or even more for their annual services. Evidently, this reduces the dividend rate a lot.
This is why another good plan you could follow is low-cost index funds. Actively managed funds are somewhat expensive and the people managing them are not always right, as some experts of the trade state. A widely preferred ETF is SPDR S&P Dividend. It charges 0.35% in expenses and yields some 2.3%. Apart from that, you could also go for the Vanguard Dividend Appreciation ETF. It’s a good choice because it comprises shares from companies that have a 10-year history of increasing their dividends every annum, at least. Indeed, the yield on this particular fund is lower, standing at 2%, but they charge you only 0.10% for the annual expenses. Use an online calculator to figure out which is the best option for you, monthly or on a year basis.
#6. Fanning Out Risks by Receiving Dividends from a Variety of Funds
Diversification is one of the biggest problems when it comes to dividend investing. Funds that usually amass dividends especially from American blue-chip companies tend to share a portfolio. However, some funds, being aware of this situation, stretch their range further when they search for dividends. For example, Wisdom Tree SmallCap Dividend has a yield of 2.7% from smaller companies in their portfolio that meet the required criteria for liquidity. Some other great choices are Argo Investments Limited, the Chimera Investment Corporation (CIM), and the Edinburgh Investment Trust PLC.
There are also some ETFs that own foreign stocks which pay handsome dividends. PowerShares International Dividend Achievers is one of those ETFs. It receives a 12 month 2.2% trailing yield from companies such as the Lukoil SP corporation, AstraZeneca PLC, and Vodafone Group PLC.
#7. Using Stocks and their Dividends as Solely One Source of Income from Your Portfolio
One important piece of advice regarding dividends and investing comes from Morgan Stanley Wealth Management. They always tell their clients to go for variety as far as their income is concerned. Variety means working with bonds, stocks, master limited partnerships, and preferred shares. When you blend these categories the result might be a very reasonable income, as well as protection, should the rates go unexpectedly higher over the following few years.
For example, MFS Diversified Income receives approximately 2.8% yields from a mix of stocks that pay dividends, investment trusts in real-estate, US bonds that have high yield paying, and bonds coming from emerging-markets. You can always redefine your exposure towards these areas, depending on where exactly you see an opportunity for appreciation and income.
No matter which strategy you plan on choosing, make sure you do some research beforehand. Usually, seniors of the trade post a review or two, which are interesting to read. You can also find testimonials. A blog is an idea you can trust too. Sign up for a newsletter and read 101 books that cover the matters you’re interested in most.
The answer to the question how to invest in dividend stocks is many fold. In the end, choosing between various dividend investing strategies that work comes down to you and you alone. You need to take into consideration your age, your budget, skill set, tolerance to failure, and last but not least, work on setting some clear goals. It might be that you want a little extra money for a vacation or you plan an early equity based retirement. Once you have all these factors straightened out, you will know which one of the above strategies is best for you.