10 Tips Every Beginner Dividend Investor Needs To Know
At one point in time, every person on this planet was a beginner – Michelangelo, Chopin, Einstein and Buffett.
You don’t know what you don’t know, so here’s to hoping you find something useful in this post – and learn something you didn’t know!
#1 – Know your goal
Investing without a clearly written down goal is like walking in any direction, without a map or a plan and hoping you’ll end up someplace wonderful.
Your goal shouldn’t be too small, is allowed to change, and will be your North star on your investment journey.
Many dividend growth investors are not worried about outperforming the S&P 500, but receiving growing and compounding dividends year after year that will meet their specific goals.
Knowing why you are investing is critically important to your sustained success over many years and without a clear goal, you may just endlessly wander the investment landscape.
For a more in-depth discussion, check out this TheBalance.com article HERE.
#2 – Dividend investing takes work
Picking individual dividend companies to invest in takes time, research and more risk. If you are not prepared to spend several hours a week initially learning and developing your strategy, we’d recommend dividend ETF’s.
An ETF stands for Exchange Traded Fund and is an excellent investment alternative for those not willing to put in hours of research.
We put out a video on the 11 best dividend ETF’s that allow you to purchase a basket of companies all in one shot. Watch our video or read a few listicle articles on them like this one from U.S. News.
#3 – Buy the business’ cash flow and not the stock
Never forget that when you buy stock, you are buying a business and becoming a business owner. These are real companies and not just a ticker symbol in your account, like betting a horse at the racetrack. You are buying a share of the companies assets and profits.
A simple trick we like to use is to think of the stock we just bought as a sunk cost, something that cannot be sold ever again. In return, we are receiving cash flow from the company in the form of a growing dividend year after year.
This helps us to focus on the company and not the share price, which isn’t necessarily always reflective of the business and their fundamentals.
#4 – Do NOT chase yield
It’s very tempting to look at a company paying a dividend yield of 9%, 12% or even 15% and want to get in on that. But remember, when share price drops, dividend yield pops! Dividend yield can and will change daily and often a sky high yield is indicative of a bad company and an unsustainable dividend.
On the flipside, avoiding companies with low dividend yields can also be costly.
For example – buying a single share of Microsoft in February 2017 at a price of $64, had a starting yield of 0.61%. If one was only looking at starting yields above, say, 2.50%, you would have ignored this gem.
As of this writing, Microsoft has a current value of $300.95, good for a gain of 370%. Your current yield on cost of $64 would be an incredible 3.88%, even though the current starting dividend yield is 0.82%.
Be highly skeptical of high dividend yields, but don’t automatically dismiss low starting yields either.
#5 – Quick check the dividend history
Many research websites have detailed stock information, but for this example we’ll look at SeekingAlpha.com where you’ll enter a ticker symbol in the search bar, click on the “Dividends” tab (4 over from the “Summary” tab), then click on the “Dividend History” tab. There you’ll find a nice chart showing the last 5 years of dividend payments. Click HERE for an example.
If you’re considering owning a company for a growing dividend, this is one of the first and easiest checks you can do to eliminate a consistent dividend cutter.
#6 – Start with the Kings and Aristocrats
Dividend Kings have increased their dividend every year for 50 years.
Dividend Aristocrats have increased their dividend for 25 consecutive years.
These are the cream of the crop when it comes to dividend growth companies, but, they may not offer the highest yields or quickest dividend increases.
Do be aware that just because a company has increased their dividend for 50 years does not guarantee a 51st.
Many of these companies are excellent foundational dividend growth companies for a beginner portfolio.
#7 – Always reinvest your dividends
Very simple and straightforward, there are two ways to reinvest your dividends received – D.R.I.P. & Target.
A Dividend Reinvestment Plan or DRIP will use your dividends received to purchase more shares of the company that just paid them. This is a fantastic way to automate compounding as you will dollar cost average into more shares, buy less shares at higher prices and more shares at lower prices. Just set it and forget it.
SeekingAlpha.com has a really good article on and a nice chart on DOUBLE COMPOUNDING – reinvesting dividends + dividend growth, which really gets your snowball growing!
Target allocating dividends is what we like to do. This requires a bit more work as we let dividends collect in our accounts and then we will target shares in positions we are trying to build or we feel are a good deal.
#8 – Always check the free cash flow payout ratio
Simply put, the free cash is what’s left over after paying all the bills and keeping the business running, which is used for many things, including dividend payments.
If a company is paying out too much of their free cash as a dividend, there won’t be much left over to grow the business, which is needed to increase future dividends.
And if the free cash flow per share exceeds the dividend paid per share, in the long run the dividend will have to be sustained with new shares, new debt or it will be cut – all of which are bad.
Financecharts.com has a super easy and free chart for beginners showing the current and recent FCF (Free Cash Flow) payout ratio.
Sticking with our Microsoft example, check out their FCF ratio HERE.
Regardless of when you’re reading this, it’s highly likely that Microsoft will have a low payout ratio, usually under 40%.
Many dividend growth investors like to see the FCF payout ratio under 70%, with some setting the bar even lower at 60% to be safe.
But, do be aware that some industries have high payout ratios like tobacco companies, and others the FCF ratio will not apply, like REIT’s (Real Estate Investment Trusts), of which we use FFO (Funds From Operations).
Seekingalpha.com has an excellent and free article covering REIT’s and their dividends HERE.
#9 – Buy with margin of safety in mind – maybe
This we feel is subjective, because it requires guesswork and is by no means a perfect way to value a company.
The general idea is that the value of a company is the sum of all future cash flows that the company will generate discounted back to today.
So, some investors will only buy a company when it is 10% or 20% below it’s intrinsic value – in other words, the margin of safety.
Check out this seekingalpha.com article for the full breakdown HERE.
But, if you prefer the easy way, sign up for a free account at alphaspread.com and use their wonderful INTRINSIC VALUE CALCULATOR.
We say “maybe” because we just don’t know what the future holds and sometimes paying “full price” for a quality company today, can look like a really good deal 5 or 10 years from now.
Not to mention all the dividends that could have been compounding while waiting for the share price to drop below it’s intrinsic value.
Solid companies with durable competitive advantages should continually increase in price over time as these companies are good investments, making them more valuable to the stock market.
If one intends to hold a company for decades, there are worse options than paying “full price” for a quality company that makes the world go around.
#10 – Accept that you will make mistakes
In life as in investing, mistakes will be made – and that’s ok.
Human beings are imperfect, so we will always be making mistakes. This is actually a good thing, especially early on in an investing journey.
The key thing to remember is that the first time a mistake is a lesson, but the second time it’s a choice.
Learn from your mistakes and try your hardest not to repeat them and you’ll be a better investor than you were yesterday.
And being better than we were yesterday is all we really have control over as human beings on this spinning blue ball.
Let us know what your favorite beginner investing tip or trick is or what we missed.
Cheers and never stop investing in yourself!