Why invest in dividend stocks?
Why should you invest in dividend stocks at all? Wouldn’t it be better to focus on growth instead of dividend? Well, focusing on growth never worked that well for me. It is difficult to predict which companies will keep growing. Growth stocks are expensive and if the company couldn’t fulfill its promises, your investment won’t do well. It’s stressful for me to keep checking the stock price every day. Also, I tend to sell too early when investing in growth stocks. I had Amazon, Netflix, and a number of other growth stocks. When they did well, I usually sold. I think investing in dividend stocks suits my temperament better. However, if you enjoy frequent tinkering with your stock portfolio, then a dividend portfolio might be too boring for you.
Here are the reasons why I like investing in dividend stocks.
Less volatility – Solid dividend stocks are more stable than growth stocks. Their stock prices don’t bounce around as much.
Predictable income – Dividend income is a relatively stable source of income. This is good when you’re retired. Dividend income is also taxed at lower rate than your active income. We didn’t have to pay any tax on our dividend income in 2015. I’m not sure about 2016 yet.
Long term investing – It’s easier to invest for the long term with dividend stocks. I don’t have to worry as much about how the stock will do in the future because these are solid companies. Our portfolio doesn’t churn much now.
All in all, dividend investing is less stressful and it should hold up better through a bear market. Dividend investing is like the turtle. It will keep chugging along slowly, but surely. This works well for us.
*Note – We invest in dividend stock with our taxable brokerage accounts. All of the money in our retirement accounts are invested in low cost index funds.
The Dividend Growth Strategy
The main strategy for our dividend portfolio is to invest in solid companies with good track records of raising their dividend. This way, our dividend income will grow every year even if we can’t add new money. We have been doing pretty well so far since we started following this strategy.
Prior to 2012, I didn’t really have a strategy. Most of the investment in our taxable account was in my old company stock and whatever stocks sounded good at the time. Switching to the dividend growth strategy made investing much less stressful and the income will come in very handy when Mrs. RB40 finally retires.
Here is our dividend income record since 2012.
2012: $6,791
2013: $8,036
2014: $8,759
2015: $10,695
2016: $11,232
2017: projected $11,300
Actually, our 2017 dividend income should be a little higher than projected and hopefully surpass $11,500. The great thing about the dividend growth strategy is that our dividend income should increase every year. This is due to three factors.
Reinvested Dividend– I reinvest most of our dividend income in new stocks. This will increase our total shares and dividend income.
Dividend Growth– Most of the companies in our portfolio should increase their dividend payout every year. There will be some exceptions as some companies face problems. Last year KMI and Diebold cut their dividend. Mattel, Caterpillar, and John Deer did not increase their dividend in 2016. We’ll keep a close eye on these companies to see if we need to kick them out of our portfolio. Other than these, all our stocks increased their dividend a little bit.
New Investment– We plan to add new money to our dividend portfolio whenever we have extra savings. This will also increase our total shares. In 2017, I plan to reinvest whenever we can. Last year, I held off too long on reinvesting and I didn’t like sitting on the sideline.
How to Start Investing in Dividend Stocks
It can be a little intimidating to start investing in dividend stocks. There are thousands of companies that you can invest in. How do you know which stock is good? If you’re just starting with dividend investing, here is a basic guide to get you started with a few solid companies. Don’t be intimated by the jargon, I will explain them below. I’ll also show you where to look up the data.
Start with Dividend Aristocrats
PE ratio is less than 20
Dividend yield is more than 2.5%
Payout ratio is less than 70%
EPS for the next and past 5 years should be positive
Oh, you’d need a brokerage account, too. I recommend a simple discount brokerage like Firstrade or TradeKing.
Start with the Dividend Aristocrats
The Dividend Aristocrats are stocks in the S&P 500 index that have increased their dividend payout for 25 consecutive years. These companies are committed to their dividend and we shouldn’t see a lot of dividend cut. Recently, the Dividend Aristocrats have done very well compared to the S&P 500 index. Many investors are looking for income and they have been buying dividend stocks.
The Dividend Aristocrats list is updated every year. Companies are kicked out if they cut dividend and some companies are added as they satisfied the 25 consecutive years of dividend raises. When you’re start building a dividend portfolio, it’s best to stay conservative and go with these solid companies. Once you’re more familiar with dividend investing, then you can branch out and buy more adventurous stocks.
Here is the list of Dividend Aristocrats in 2017. (The data here is from the beginning of January, 2017.)
Name
Ticker
Price
P/E Ratio
Dividend Yield
Payout
Ratio
CARDINAL HEALTH INC
CAH
$72
13.8
2.5%
35%
ABBVIE INC
ABBV
$63
13.2
4.1%
54%
AFLAC INC
AFL
$70
10.4
2.5%
26%
FRANKLIN RESOURCES INC
BEN
$40
13.5
2.0%
27%
T. ROWE PRICE GROUP INC
TROW
$75
15.5
2.9%
45%
VF CORP
VFC
$53
17.1
3.1%
54%
PENTAIR PLC
PNR
$56
14.8
2.5%
37%
TARGET CORP
TGT
$72
14.2
3.3%
47%
LOWE'S COS INC
LOW
$71
20.4
2.0%
40%
W W GRAINGER INC
GWW
$232
20.0
2.1%
42%
MEDTRONIC INC
MDT
$71
15.9
2.4%
38%
HORMEL FOODS CORP
HRL
$35
22.3
2.0%
44%
WALGREENS BOOTS ALLIANCE
WBA
$83
18.0
1.8%
33%
ABBOTT LABORATORIES
ABT
$38
17.7
2.8%
49%
JOHNSON & JOHNSON
JNJ
$115
17.6
2.8%
49%
AIR PRODUCTS AND CHEMICALS
APD
$144
19.1
2.4%
46%
PPG INDUSTRIES INC
PPG
$95
15.9
1.7%
27%
PROCTER & GAMBLE CO
PG
$84
22.6
3.2%
72%
SHERWIN-WILLIAMS CO
SHW
$269
22.4
1.3%
28%
AT&T INC
T
$43
15.1
4.6%
70%
EMERSON ELECTRIC CO
EMR
$56
18.7
3.4%
64%
BECTON DICKINSON AND CO
BDX
$166
19.2
1.8%
34%
MCDONALD'S CORP
MCD
$122
22.5
3.1%
70%
S&P GLOBAL
SPGI
$108
21.0
1.3%
28%
WAL-MART STORES INC
WMT
$69
15.3
2.9%
44%
ECOLAB INC
ECL
$117
26.9
1.3%
34%
COLGATE-PALMOLIVE CO
CL
$65
23.3
2.4%
56%
KIMBERLY-CLARK CORP
KMB
$114
19.0
3.2%
61%
LEGGETT & PLATT INC
LEG
$49
18.8
2.8%
52%
ILLINOIS TOOL WORKS INC
ITW
$122
22.3
2.1%
47%
3M CO
MMM
$179
22.1
2.5%
55%
COCA-COLA CO/THE
KO
$41
19.6
3.4%
66%
STANLEY BLACK & DECKER INC
SWK
$115
17.4
2.0%
35%
GENUINE PARTS CO
GPC
$96
20.6
2.8%
57%
PEPSICO INC
PEP
$105
22.3
2.9%
64%
ARCHER DANIELS MIDLAND CO
ADM
$46
22.5
2.6%
59%
DOVER CORP
DOV
$75
23.9
2.3%
56%
AUTOMATIC DATA PROCESSING
ADP
$103
29.9
2.2%
66%
CLOROX CO
CLX
$120
24.1
2.7%
64%
SYSCO CORP
SYY
$55
24.6
2.4%
59%
BROWN-FORMAN CORP
BF-B
$45
26.5
1.6%
43%
CINTAS CORP
CTAS
$116
25.4
1.2%
29%
C R BARD INC
BCR
$225
22.6
0.5%
10%
MCCORMICK & CO INC
MKC
$93
25.2
2.0%
51%
CINCINNATI FINANCIAL CORP
CINF
$76
19.5
2.5%
49%
EXXON MOBIL CORP
XOM
$90
42.2
3.3%
140%
CONSOLIDATED EDISON INC
ED
$74
18.9
3.6%
69%
NUCOR CORP
NUE
$60
26.5
2.5%
67%
HCP INC
HCP
$30
31.5
5.0%
157%
CHEVRON CORP
CVX
$118
272.5
3.7%
1000%
PE Ratio is less than 20
The PE (price to earnings) ratio is the price of the stock divided by their earnings. The bigger the PE ratio is, the more highly valued the stock. For example, Facebook’s PE ratio is 60. This is fine for growth stocks because their earnings are growing rapidly. For dividend stocks, the PE ratio should be closer to their historical average because they only grow a little bit every year.
P/E ratio = Stock Price/Earnings
You can get the Price/Earnings ratio from finviz, Morningstar, Yahoo Finance, and many other financial sites. We’ll look at Target (TGT) at finviz for example.
Currently, Target’s PE ratio is 11.8. That means the stock is a pretty good bargain at this time. Target is being valued at a discount due to the shift to e-commerce. Many retailers are hurting right now.
Anyway, the PE ratio for the S&P 500 is quite high (around 25) at this time and I prefer to invest when a stock is undervalued. We’ll only invest in companies with a PE ratio of less than 20.
Dividend yield is more than 2.5%
Now, let’s look at dividend. Dividend yield is the percentage of dividend payout to the stock’s price.
Dividend Yield = Dividend/stock price
Target’s dividend yield is currently 3.7%. When the dividend yield is low, it can mean a couple of things. The stock price could be too high or perhaps they haven’t raise dividend recently. I usually invest in stock with at least 2.5% dividend yield.
Also, we should be cautious if the dividend yield is too high. 3.7% is pretty high for Target and it means investors think the stock price won’t increase much in the years to come. As e-commerce continues to grow, Target might not be able to adapt and their earnings could drop. Things are changing in the retail world.
Payout ratio is less than 70%
The payout ratio is the percentage of earnings paid out as dividends.
Payout ratio – dividend/earnings per share
Generally, we should avoid investing in companies that pay out too much dividend. If a company pays too much dividend then they won’t have much money left to invest in the company. Also, they might not be able to keep increasing the dividend if they are already paying out a huge percentage. Target’s payout ratio is currently around 41%. That’s pretty good.
EPS for the past and next 5 years should be positive
EPS is earnings per share. This should be positive for the past 5 years and next 5 years. This shows that the company is still growing. If we see a negative number here, it means the company is not growing. (The EPS next 5Y is an estimate.)
More research
Those are the baseline criteria you should look at when you’re investing in dividend stocks. If you are interested and have extra time, you probably should check these other things, too.
Sales growth – Is the company’s revenue growing? Target’s revenue is down like most retailers and this is causing the stock price to drop recently.
Management team – Is the management team stable?
Our Dividend Portfolio
Here is our current dividend portfolio. You can see there are quite a few Dividend Aristocrats here.
Stock
shares
price 1/1/17
Value 1/1/17 ($)
expected dividend 2017 ($)
Intel
411
36.27
14907
370
AT&T
200
42.53
8506
392
Eli Lilly
100
73.55
7355
204
Shell
400
57.97
23188
1504
Target
150
72.23
10835
360
Leggett & Platt
500
48.88
24440
680
VPL
200
58.12
11624
326
Abbott Lab
100
38.41
3841
106
AbbVie
100
62.62
6262
256
Aflac
100
69.6
6960
172
JPMorgan Chase
100
86.29
8629
192
McDonald
100
121.72
12172
376
Coke
100
41.46
4146
140
Diebold
100
25.15
2515
40
Mondelez
200
44.33
8866
152
Altria Group
200
67.62
13524
488
Western Union
500
21.72
10860
320
Mattel
200
27.55
5510
304
General Mills
100
61.77
6177
192
Procter & Gamble
100
84.08
8408
268
Walmart
200
69.12
13824
400
Kinder Morgan I
100
20.71
2071
50
Sysco
300
55.37
16611
396
National Retail Property
200
44.2
8840
364
Universal Corp.
200
63.75
12750
432
Deere & Co.
100
103.04
10304
240
General Electric
400
31.6
12640
384
Phillip Morris
150
91.49
13724
624
Omega Healthcare
100
31.26
3126
244
Caterpillar
50
92.74
4637
154
Lloyd Group
700
3.1
2170
63
Annaly Capital
200
10.35
2070
240
Amgen
40
153.199
6128
184
Consolidated Edison
100
73.519
7352
268
Kimberly Clark
100
115.654
11565
368
Hasbro
25.12
77.79
1955
43
Money market
738
1
738
RB40 Dividend Portfolio
$329,228
$11,296
VIG
3865.34
85.15
$32,9134
$7,076
I’m generally happy with the portfolio as it is. I’ll keep an eye on Diebold and Kinder Morgan. If condition deteriorates, then I might need to sell them.
When to sell?
Selling is actually the biggest issue for me now. I prefer to just hold because I don’t like selling. Some dividend investors sell as soon as there is a dividend cut or no dividend growth. This probably is a good idea. I probably need to do a detailed review twice per year to make sure all the stocks in our portfolio still satisfy the basic criteria.
Benchmark
I’ll use VIG (Vanguard’s Dividend Appreciation ETF) as a benchmark for our portfolio. We’ve been able to beat them over the last 2 years. If we can’t beat VIG, then it’s probably easier to just go with them instead of managing a dividend portfolio. That’s a pretty good alternative for new dividend investors too. You could go with VIG and SDY (SPDR S&P Dividend ETF) instead of managing your own portfolio.
I plan to update how our dividend portfolio monthly in this post – See How We’ll Generate Passive Income in 2017. There you can also see other ways that we generate passive income and how close Mrs. RB40 is to her retirement.
Track your Dividend Income
Lastly, here is a way to easily track your dividend income – sign up for Personal Capital. Personal Capital is a great free site for investors. They have many tools that can help you keep track of your investments including the 401k Fee Analyzer and the Retirement Planner. I log on to Personal Capital almost every day and they have been extremely useful. (This is an affiliate link and we may receive a referral fee if you use this link to sign up with them.)
Okay, that’s how to start investing in dividend stocks. If you’re a dividend stock investor, do you have other criteria on your list? When do you sell your dividend stocks?
Other resources
dividata – You can check dividend history and their dividend ratings here.
Morningstar – A lot of financial info here.
finviz – More numbers.
How to Start Investing in Dividend Stocks is a post from: Copyright © 2010-2016 Retire By 40 All Rights Reserved
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