With my debt and savings habits under control, lately my thoughts have been more so on investing strategies. One investment strategy that I believe in, as you may know, is dividend investing.
Dividend investing can mean a couple things. It could include investing for yield or dividend growth. Investing for yield is simply basing purchase decisions on the dividend yield of the stock. The higher the percentage yield, the better. The Dogs of the Dow strategy comes to mind for this one. In my opinion, basing investment decisions on yield alone is a dangerous game. More times than not, an abnormally high yield simply means an unsustainable dividend. When the dividend payouts become too much for the company to carry, dividends are typically cut dragging the stock price with it.
Investing for dividend growth is making purchase decisions based on the history of growing dividend payments over the years. Although the initial purchase yield may be lower, it’s a great strategy for buy and hold investors as it gives raises to loyal shareholders over time. Buying and holding dividend growth stocks is more in alignment with my beliefs and is one of the key components in my dividend investing strategy.
Having explained the two strategies, I use a combination of the two when making purchase decisions. I narrow down the list of strong dividend companies based on a history of dividend growth, but only make my purchase when that particular stock reaches a yield threshold.
How do I determine the yield threshold? By going back through the history of dividend payments and figuring out the average yield over the years. Once that is determined, I usually pick a yield that is above average which then can be converted into a target stock price. From there, I can watch the market (or use alerts) to indicate that it’s time to pick up a new position.
The Process of Finding Dividend Stocks to Buy
- Pick your stocks. Find strong dividend stocks with a history of increasing their dividends over the long term. A great place to start is our list of best Dividend stocks in Canada.
- Calculate the average yield. Do your research and figure out the average stock yield over the past 5 or more years. One tool for this is Yahoo Finance historic prices tool. You can select “dividends only” which will list dividend distributions over the past several years (depending on the stock). Another way, which may be easier, is to use BigCharts.com and select “Lower Indicator” to be “Yield”. It will graphically show you what the yield has been in recent history.
- Pick your buy point. Select the yield at which you would be comfortable purchasing and convert that into a stock price. For example, if Royal Bank’s average yield over the past several years has been around 3.5%, I may pick a buy point of 5% yield. The current dividend is around $2/share which would equate to a target buy price of $40 ($2/0.05).
- Use stock alerts. As we are all busy people, it’s a challenging task to keep your eye on the market which is why I use stock alerts. There are various ways you can do this such as MSN money alerts, an Excel spreadsheet (with stock addin), or even a Google Spreadsheets (built in stock price functionality). MSN Alerts are prehaps the most convenient if you are a MSN messenger user. The spreadsheet option can provide more details, but requires that you check the spreadsheet periodically for buy signals which may or may not be convenient.
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Although not overly detailed, that’s a fairly comprehensive overview on my dividend picking process. For those of you who are fairly new to the blog, here my most recent dividend portfolio update.
I know there are a good few hardcore dividend investors reading this, do you have anything to add?
In a future post, I will put more details into how I use spreadsheets for stock alerts.If you would like to read more articles like this, you can sign up for my free weekly money tips newsletter below (we will never spam you).