Most investors primarily consider stock price gains when making investment decisions; however, paying attention to dividends can provide long-term wealth-building returns. Seek out quality companies with an established history of increasing dividends for optimal total return investing results.
Avoid overeagerly chasing high yields, however, as this could lead to “dividend traps” – stocks which fail to deliver on their promised payouts.
1. Dividend Capture
Dividend capture traders purchase shares prior to an ex-dividend date, which marks when a company announces plans to distribute part of its profits as dividends to shareholders. On dividend payment day, all shareholders who owned shares on or prior to ex-dividend date receive their dividend payout irrespective of when or why they bought or sold them.
Investors seeking high yield stocks with proven histories of raising dividends tend to prioritize blue-chip companies with stable earnings as their dividend yield potential is greater, but other riskier businesses also can produce impressive yields.
This trading strategy can be advantageous to investors who know what they’re doing, but also comes with risks. Transaction costs may eat into dividend yield and traders don’t enjoy preferential tax treatment that investors do. Furthermore, stocks may drop in value on ex-dividend day, rendering this trading strategy less profitable.
2. Buy-and-Hold
Buy-and-hold investors take an approach known as long-term investing which involves purchasing financial securities (stock) with the intent to hold on for as long as possible and reap any potential capital appreciation opportunities that arises in their portfolios. By buying stocks with this long-term strategy in mind, buy-and-hold investors are able to ride out financial market volatility more comfortably while taking advantage of potential capital appreciation potential.
Fundamental analysis is at the core of what drives this type of investor. Earnings per share paid out by companies reflect how profitable their businesses are for shareholders; those that generate more earnings overtime tend to increase in value more quickly, meaning more profits and thus an increased stock value over time.
Buy-and-hold investors differ from active traders in that they make few decisions during the lifetime of an investment, rather than trying to time purchases and sales with market peaks and valleys. While these investors should remain vigilant for changes that warrant realigning portfolio asset allocations or monitoring news such as quarterly earnings reports, buy-and-hold investments require closer monitoring for changes that warrant reallocation decisions or must remain informed on current events such as quarterly earnings reports.
3. Dividend Reinvestment
Dividend stocks can make an appealing addition to any portfolio due to their potential to provide steady investment income streams, making them particularly suitable for retirees relying on investments for income. One way of increasing the impact of dividend-paying stocks is through their Dividend Reinvestment Plan (DRIP), which automatically invests your cash dividends into additional whole or fractional shares of a stock on their payment date.
However, it’s important to keep in mind that DRIP isn’t your only investment option for dividends. You could also choose to spend or save them, combine them with other payments or sources of cash and purchase assets with greater risk-return profiles than DRIP offers.
4. Dividend Growth
Investors tend to focus mainly on price gains when making investment decisions, but dividends should also be considered an integral component of total returns. Dividends provide cash needs while protecting from market volatility by helping meet cash needs or cushion losses during volatile times.
Investors looking to diversify their income stream should identify companies with a track record of increasing dividends, as these organizations tend to better weather economic volatility, providing long-term investors with consistent and growing returns over time.
Attracting investors nearing retirement who wish to supplement their pension or Social Security benefits through dividend investing may be attractive, yet investors must remember there are risks associated with dividend stocks; one significant risk being the possibility that a company could cut their dividend payments, potentially diminishing your return and impacting returns adversely. To mitigate this risk, diversifying portfolios across industries and companies is recommended in order to help minimize this possibility.
