I love writing about the basic principles of dividend investing, value investing and defensive investing.
So I thought I’d take a step back and write a meat-and-potatoes beginner’s guide to dividend investing containing just a handful of the most important points.
It isn’t rocket science, and the basic principles are:
- Invest in lots of dividend-paying companies at the same time
- Invest in companies with steady long-term dividend growth (supported by revenue and earnings growth)
- Invest in low risk companies with strong balance sheets
- Invest when share prices are low and dividend yields are (relatively) high
- Sell companies when their combined growth rate, risk profile, share price and dividend yield are no longer attractive
It’s simple, but not necessarily easy.
One of the major ‘not easy’ bits is finding dividend-paying companies worthy of further analysis. There are paid services that can help with this (including my own investment newsletter) but there are some free options too.
Some of the best ones are:
- Dividend Champions UK – For lists of UK stocks with long histories of dividend growth.
- London Stock Exchange Companies and Securities spreadsheet – A list of UK stocks along with their industry, sector, index and market cap.
- Morningstar – Search Morningstar using a company’s name or ticker code and get a comprehensive set of five-year accounting data. For example, here’s the page for BT Group.
- FE Investegate – This site has ten years of data (although not as comprehensive as Morningstar) and regulatory news announcements for hundreds of companies. Here’s the fundamentals page for BT Group.
- Company analysis spreadsheets – My very own spreadsheets where you can calculate all manner of long-term dividend investing-related metrics.
The rest of this beginner’s guide to dividend investing is in this month’s Master Investor magazine.
You can download the full article and the magazine below:
Note: If you’re an old hand at the dividend game then you might still want to read this guide because it’s always good idea to revisit the basics.
Hi John,
Quite a few good points raised. I think the stocks held in VANGUARD FUNDS PLC FTSE 100 is a good example of the dividend stocks you’ve mentioned.
I would go as far and say most people should hold this in their portfolio if they are a beginner and have no understanding of accounting if they wish to prescribe to dividend investing. This is for the two reasons you’ve mentioned in your article:
1) The portfolio is well diversified into ten sectors.
2) A bias towards reliable dividend-paying stocks
I also believe that an average investor will be unable to control themselves between bull and bear runs of the stock market. This means that they are most likely to sell/buy the stocks at the worst time. An index fund like VUKE should hopefully protect you from this because of its diversified portfolio the price volatility is minimal compared to individual stock. Therefore it will never outperform as well as individual stocks during a bull run but its also unlikely to underperform during a bear run.
For the average investor, it’s a pretty good deal because you can leave it alone and allow it to appreciate. Also, you get a decent yield of 4% currently. Therefore if the annual capital appreciation of the stock is 4% then your total return is 8%. Hopefully, you can beat both the inflation rate and the discount rate set by the Bank of England.
In the long term, you will never outperform individuals like Warren Buffett or Lord Rothschild but you will never lose your cash to inflation chances are you will have a pretty nice pile to retire on.
Hi Reg, I agree. Most people should just stick with passive index trackers (whether FTSE 100 or something more global) whether they’re after income or growth.
However, in my mind I tend to think of ‘dividend investing’ as buying individual dividend-paying stocks, whereas I think of investing in income-paying funds (whether equities, bonds or whatever) as ‘income investing’.
So although I agree that index trackers are the way to go for most people, this article (and pretty much everything I write) is for investors who do want to invest directly in individual companies.
If you’re looking for articles on passive investing then have a look at Monevator; they have a ton of info on that subject.
I also agree that if in doubt stick to using low cost trackers. However I don’t believe that buying trackers necessarily means that people are less inclined to sell at the wrong time. Indeed an understanding of the underlying fundamentals of the companies in a portfolio may give the investor a better view of the difference between say, an irrational market sell off and a more serious deterioration in the financial condition of the investments. There is also the issue of the way market cap weighted trackers end up potentially skewing the portfolio towards poorer value constituents.
At the end of the day I think the point is whether or not you believe your own active strategy will beat the index over your investment horizon. If you are not confident it will then invest in a tracker and enjoy the time doing other things!
Hi
What do you think of Swedish Stocks? Do you own any?
Iam right now writting my thoughts about Autoliv.
Take care 🙂
Swedendivin
Sorry but Swedish stocks are somewhat off my radar!
You should check them out. Some of them are diamond clear.