Topic: Dividend Stocks

Successful long-term dividend investing strategies can add significantly to your gains over time

January 3, 2024|by Scott Clayton

Add Comment

Your long-term dividend investing strategy should include both growth and value stocks. That will keep your income high—and add capital gains as well

If you include top-quality dividend stocks in your portfolio, the income you earn can supply a significant percentage of your total return—in fact, as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.

Note, though, that when it comes to long-term dividend investing safety, a long history of steady dividends is typically more important than a current high dividend yield (more on that below).

The Growing Power of Dividends Learn everything you need to know in '7 Winning Strategies for Dividend Investors' for FREE from The Successful Investor. The Best Canadian Dividend Stocks to Buy: REITS Canada and other Top Canadian Dividend Stocks.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

You can include growth stocks as part of a long-term dividend investing strategy to boost your returns

A dividend growth investing strategy looks for growth stocks that also pay a dividend, which is less common than with, say, value stocks. The best growth stocks can offer above-average gains, and the dividend just adds to their appeal.

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.

Dividend stocks are an important contributor to your long-term gains, and dividend-paying stocks typically expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers. 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.

Furthermore, when considering specific investments and buying or selling growth-stock picks start by putting all the important information you know about a company into perspective. For instance, while its new invention may be a marvel, how does it compare to what the competition is doing? Its new project may sound impressive, but how much impact will it really have on the company’s profit? If the firm’s debt looks high—will the company be able to keep up its agreed-upon interest and principal repayments?

Value stocks can be a key part of successful long-term dividend investing

At the core of the value investing approach is the ability to identify well-financed companies that are well-established in their businesses, have a history of earnings–and yes, dividends. They are likely to survive any economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does. At the same time, they are cheap in relation to these measures.

Virtually all successful investors have some understanding of value investing, many have some knowledge of technical analysis, and most have some knowledge of a variety of other tools and shortcuts that can point out stocks worth looking at more closely.

Another key point about value investing is you shouldn’t sell high-quality stocks just because their prices have dropped. Nor should you sell them just because they’ve gone out of investor favour. Well-established, dividend-paying, but out-of-favour stocks, can provide great opportunities for patient investors.

Take advantage of compounding to get the best results when you’re investing for long-term growth

Investors who incorporate long-term dividend investing into their portfolios will gain from the magic of compounding.

Compound interest can be considered the mother of all long-term investment strategies. This tip is especially important for young investors to learn. And the benefits of compounding apply not only to fixed-return, interest-paying investments like bonds, but also to stocks. When you earn a return on past returns, including reinvesting dividends, the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

Some high dividend yields can be signs of dividend stocks you should avoid

Long-term dividend investing, as mentioned, can add a lot to your portfolio returns. But when looking for stocks with high dividend yields, you should avoid the temptation of seeking out stocks with the highest yield simply because they have above-average yields.

That’s because a high yield may signal danger rather than a bargain if it reflects widespread investor skepticism that a company can keep paying its current dividend.

Dividend cuts will always undermine investor confidence, and can quickly push down a company’s stock price.

Conversely, a track record of dividend payments is a strong sign of reliability and a strong indication that you may be investing in the best long-term dividend stocks.

Use our three-part Successful Investor approach to succeed—including with long-term dividend investing

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

Some investors believe dividend-paying stocks are overrated. How do you feel?

How much does long-term dividend investing factor into your retirement strategy?