What is dividend investing? Dividend investing is building an investment portfolio of stocks with the main goal of “harvesting” dividends. Let’s take the main two elements of this definition of dividend investing, stocks and dividends, and define those as well.

A stock is a type of investment that represents the ownership of a fraction of a corporation.
A dividend is a payment made by a corporation to its shareholders, usually in cash, and usually as a distribution of profits. Dividends are generally seen as a sign of corporate maturity and balance sheet strength.

⏱️TIMESTAMPS⏱️
0:00 Definition of dividend investing
0:44 How to start dividend investing
1:22 Dividend yield
1:55 Free cash flow versus dividends paid
3:04 Stock fluctuations
3:38 Top dividend paying companies in the DJIA
4:09 Is it possible to live off dividends?
6:00 Dividend investing ETF
7:11 Dividend aristocrats

How do you start dividend investing? Here’s example number one. You could take the companies in the Dow Jones Industrial Average, and start from there. Here are all 30 companies that are currently in the Dow Jones Industrial Average, a stock market index of 30 prominent companies listed on stock exchanges in the United States. I hope some of these companies are familiar to you. Of the 30 companies, 27 are paying dividends, which is not surprising, as most of these companies are mature and generate a lot of cash from operations. For each of these 27 dividend paying companies, it is easy to find their current dividend yield online. For example, for 3M, at the time of making this video, the dividend yield was 4.1%. Dividend yield is the annualized dividend divided by the share price. This expresses how attractive the dividend paid is, relative to the share price. After all, in dividend investing we are aiming to build an investment portfolio of stocks with the main goal of “harvesting” dividends.

An important thing to check is: can the company afford to pay its dividend? To answer that question, review the free cash flow the company generates. Free Cash Flow is that part of the total cash flow that is not required for operations or reinvestment. You can calculate free cash flow from the numbers in the cash flow statement in a company’s annual report. For 3M in 2021, cash from operating activities was a cash inflow of $7.5 billion, capital expenditures a cash outflow of $1.6 billion, and therefore free cash flow $5.9 billion. Total dividends paid were $3.4 billion, so the free cash flow was easily able to cover the dividend payout. Follow-up questions to this are: what are the expectations for future free cash flows and future dividends? Do you feel comfortable that free cash flow will continue to be able to cover dividend payouts? And is paying a dividend the best way for a company to use its cash?

Be very cautious with very high dividend yield stocks, as you might get suckered into a dividend trap. A dividend trap occurs when investors are lured in by a high dividend yield, only to find the underlying company was not such a great buy after all. Maybe you are better off with our base case assumptions of 4% dividend yield, and using the power of reinvesting and compounding to build the value of your investment portfolio. Reinvesting dividends can turn your $10,000 into nearly $15,000 in 10 years, if the 4% dividend yield continues to be achieved. Dividend reinvesting taps into the power of exponential growth: the dividend snowball!

What if individual stock picking for #dividendinvesting sounds like way too much work and way too much risk? Here’s example number two of dividend investing, using ETFs, Exchange Traded Funds. ETFs provide scale and diversification, which is much harder to achieve for individual investors doing stock picking. When researching #dividend #investing ETFs, you might come across the S&P500 dividend aristocrats. These are companies that are a member of the S&P500 index. They are also companies that have increased dividends every year for at least 25 consecutive years. The underlying assumption here is that if a company has been paying and increasing dividends for that long, they are highly likely to be paying dividends going forward. That’s not an absolute certainty, but a significantly higher probability.

Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, livestreams, classroom sessions, and webinars. Connect with me through Linked In!

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