Investing in dividend stocks can be very attractive. It’s nice to receive a cash payment frequently. But what are dividends and which metrics should you take into account? Let’s teach you everything you need to know.
Pieter, I really enjoyed this post! It cleared up some of those tricky, often confusing aspects of dividend investing that I’ve always wondered about. Your insights are spot on.
I’d love it if you could dive into when it’s best to start investing in dividends to get the most out of it, especially with taxes in mind. For example, should someone focus on growing their portfolio with Quality Growth Investing and then switch to dividend stocks just a few years before retirement? I think that would be super helpful to explore.
When investing for the dividends, you obviously want to buy an investment vehicle that distributes dividends consistently and with some growth rate. No dividend or distribution is 100% guaranteed but we can use past behavior as an indication (not prediction) of future performance. You showed a graphic illustrating the dividend growth rates of Costco, Home Depot. Visa, etc and you looked at a 5 year growth. I would expand that to at least 10 years if not 20 - 30. Why such a long period? You want to see how various economic booms and busts affected the dividend. Home Depot paid it's first dividend on Sept 14, 1989 and the latest dividend was paid out on June 13, 2024. That's 34 years! In those 34 years we've seen the COVID crash, the Great Financial Crisis, the Dot-Com bust, etc. The dividend was not cut or suspended in that time! It had an annual CAGR of 13.2% over the entire time!
The downside here is the dividend yield itself. It's a bit on the low side. So, if you wanted to use Home Depot's dividend as income then you may need a substantial amount of capital invested here. What if you don't have that much capital? Then you may become a "yield chaser" and the game becomes a little more risky. Higher yields come about when prices are low and you have to ask yourself why is the price low? Is it because there is something wrong with the company? Is the company fine but growth prospects are low? Ultimately, you have to ask yourself what are the risks to the business and could these risks adversely affect the distribution in the future?
Consider Main Street Capital, ticker symbol MAIN. It's a business development company whose regular August 2024 dividend is $0.2450. The company has a spectacular history of raising the dividend and even distributing special dividends. The forward yield, not taking into account raises or special distributions already declared is 6.04%, which is 2.3x that of Home Depot! It's even higher if you take into special dividends! There's no free lunch here so what's the catch? Main Street operates in a somewhat risky space where they provide capital and financing to small and mid cap companies. Interest rates and the general macro economy can have a huge impact on their operations. They paid a regular dividend on July 15, 2019 of $0.2050 which did not get raised until October 15, 2021 to $0.2100! Why was the dividend frozen? Well, COVID happened in that time among other things! Thankfully, Main Street Capital came out of the crisis without cutting the regular dividend (the special dividends were frozen) and they are back to raising their dividends. Their story is not typical.
Maybe the dividend yield is so high that you don't need the full distribution in cash. Take 3% - 4% and use the rest to buy more stock so compounding can do its work. In that case, maybe you're OK with a frozen dividend. It's more than you need anyways.
So, sustainability is very important! I'm going to lift another line from Bogumil and say you should ask yourself is the company you are interested in buy such that it needs to have a lot of things go perfectly right in order for it to succeed? How likely are these things to happen? These kinds of questions can help you understand the sustainability of the dividend.
There's a neat website called Portfolio Visualizer that allows you to backtest different stock allocations and it shows the annual income from the dividend distribution, with dividends reinvested and not. Google is your friend. I have no affiliation with that site.
Really interesting article, I really liked this type of content because dividends is something crucial in my opinion, mostly when you get to an age where you want to live off from your investments !!
Pieter, I really enjoyed this post! It cleared up some of those tricky, often confusing aspects of dividend investing that I’ve always wondered about. Your insights are spot on.
I’d love it if you could dive into when it’s best to start investing in dividends to get the most out of it, especially with taxes in mind. For example, should someone focus on growing their portfolio with Quality Growth Investing and then switch to dividend stocks just a few years before retirement? I think that would be super helpful to explore.
Thanks for all the great content!
Hi,
Thanks for your feedback. We truly appreciate it. TJ Terwilliger wrote this post so all credits go to him.
We will defintely write something about the above in the future. Stay tuned.
PS The greatest gift we can ask for is to share this newsletter with friends & family. I appreciate you!
That's a great start! 😀
When investing for the dividends, you obviously want to buy an investment vehicle that distributes dividends consistently and with some growth rate. No dividend or distribution is 100% guaranteed but we can use past behavior as an indication (not prediction) of future performance. You showed a graphic illustrating the dividend growth rates of Costco, Home Depot. Visa, etc and you looked at a 5 year growth. I would expand that to at least 10 years if not 20 - 30. Why such a long period? You want to see how various economic booms and busts affected the dividend. Home Depot paid it's first dividend on Sept 14, 1989 and the latest dividend was paid out on June 13, 2024. That's 34 years! In those 34 years we've seen the COVID crash, the Great Financial Crisis, the Dot-Com bust, etc. The dividend was not cut or suspended in that time! It had an annual CAGR of 13.2% over the entire time!
The downside here is the dividend yield itself. It's a bit on the low side. So, if you wanted to use Home Depot's dividend as income then you may need a substantial amount of capital invested here. What if you don't have that much capital? Then you may become a "yield chaser" and the game becomes a little more risky. Higher yields come about when prices are low and you have to ask yourself why is the price low? Is it because there is something wrong with the company? Is the company fine but growth prospects are low? Ultimately, you have to ask yourself what are the risks to the business and could these risks adversely affect the distribution in the future?
Consider Main Street Capital, ticker symbol MAIN. It's a business development company whose regular August 2024 dividend is $0.2450. The company has a spectacular history of raising the dividend and even distributing special dividends. The forward yield, not taking into account raises or special distributions already declared is 6.04%, which is 2.3x that of Home Depot! It's even higher if you take into special dividends! There's no free lunch here so what's the catch? Main Street operates in a somewhat risky space where they provide capital and financing to small and mid cap companies. Interest rates and the general macro economy can have a huge impact on their operations. They paid a regular dividend on July 15, 2019 of $0.2050 which did not get raised until October 15, 2021 to $0.2100! Why was the dividend frozen? Well, COVID happened in that time among other things! Thankfully, Main Street Capital came out of the crisis without cutting the regular dividend (the special dividends were frozen) and they are back to raising their dividends. Their story is not typical.
Maybe the dividend yield is so high that you don't need the full distribution in cash. Take 3% - 4% and use the rest to buy more stock so compounding can do its work. In that case, maybe you're OK with a frozen dividend. It's more than you need anyways.
So, sustainability is very important! I'm going to lift another line from Bogumil and say you should ask yourself is the company you are interested in buy such that it needs to have a lot of things go perfectly right in order for it to succeed? How likely are these things to happen? These kinds of questions can help you understand the sustainability of the dividend.
There's a neat website called Portfolio Visualizer that allows you to backtest different stock allocations and it shows the annual income from the dividend distribution, with dividends reinvested and not. Google is your friend. I have no affiliation with that site.
I always truly appreciate your comments, Boris! You are so knowledgable!
Any certain dividend topics you want to write us about in the future?
Pieter, you flatter me with your compliments! ☺️ I'm just a street philosopher working to give an advantage and a helping hand to the common man.
I'll try sending you a DM here in a bit! 👍
Lovely. Thank you, Boris. I appreciate you!
Really interesting article, I really liked this type of content because dividends is something crucial in my opinion, mostly when you get to an age where you want to live off from your investments !!