How to Invest in Dividend-Paying Stocks for Better Portfolio Returns

If you are wondering how to invest in dividend-paying stocks for maximum gains, then you need to follow our Successful Investor approach and our tips for selecting the best of these investments

Dividend stocks are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers at all times. What’s more, as you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.

If you stick to dividend-paying stocks, you’ll avoid most of the market’s greatest disasters. That’s because a history of dividends says a great deal about a company’s long-term soundness and stability. Here are some essential tips on how to invest in dividend-paying stocks to boost returns on your long-term investment portfolio.


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How to invest in dividend-paying stocks: Look for stocks that dominate an industry

We look for dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation, industry trends, etc. to suit themselves. Minor firms can’t do that.

How to invest in dividend-paying stocks: Look for a sustainable dividend payout ratio

One of the best ways to judge whether a company will keep paying its dividend, or even increase it, is its dividend payout ratio. This simply measures what portion of a company’s earnings go to pay its dividends.

If a company keeps its payout ratio fairly steady, say at 15% of earnings, and its earnings grow, the amount you receive in dividends should also grow. However, if a company must keep paying out a larger and larger percentage of its earnings just to maintain the dividend, it is reasonable to wonder whether the company is in decline and the dividend is in danger of being cut.

You need to look at other factors, as well, of course. The company may be going through a low cycle in its industry, or have a temporary problem it has a good chance of solving.

How to invest in dividend-paying stocks: Use these 3 portfolio rules to reduce the risk of a dividend cut

Some stocks can go through dividend droughts—periods when they have to cut or quit paying dividends due to setbacks within their company, their industry or the economy as a whole.

That’s why you still need to observe our three key portfolio rules, even when confining your investments to stocks with established dividend records. They are

  1. Invest mainly in well-established companies.
  2. Spread your money out across most if not all of the five economic sectors (Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities). This cuts your risk of getting too heavily invested in an industry or sector that is headed for a slump. It also increases your chances of investing in a super stock with returns that are two to five times higher or more than the market average.
  3. Downplay or avoid stocks that are in the broker/media limelight. This limelight inflates investor expectations. When stocks fail to live up to those inflated expectations, downturns can be brutal.

Just remember that if you place too high a value on any single investment attribute, you may overlook signs of risk. That’s something an investor needs to avoid at all times, but especially in retirement.

Bonus Tip: Know your dividend dates

There are 4 key dates involved with payments from dividend stocks:

  • Declaration Date: Several weeks in advance of a dividend payment, a company’s board of directors sets the amount and timing of the proposed payment. The date of that announcement is known as the declaration date.
  • Ex-dividend Date: Two business days before the record date, the shares begin to trade without their dividend. This date is the ex-dividend date. If you buy stocks one day or more before their ex-dividend date, you will still get the dividend. That’s when a stock is said to trade cum-dividend. If you buy on the ex-dividend date or later, you won’t get the dividend. The ex-dividend date is in place to allow pending stock trades to settle.
  • Payable Date: Is the date set by the board on which the dividend will actually be paid out to shareholders.
  • Record Date: Only shareholders who hold the stock before the payable date will receive the dividend payment. That date is known as the record date, and is set any number of weeks before the payable date.

How closely do you look at dividend payout ratios before deciding whether to buy a stock?

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