Dividend Income Investing: Investors Hunt For Yield

Dividend Income Investing

Investors are hunting for yield; and dividend income investing is becoming their choice. The longevity of rates remaining low is causing investors to seek income and growth, or suffer the consequences of declining purchasing power. Risk free rates of return are near zero and 10 year Treasury Bonds are around 2%, meaning that your money is growing slower than inflation and will buy less and less each year.

Dividend Investing

Dividend investing allows an investor to get “paid to wait”.  In the long term dividends have provided 43% of the S&P 500 total return. One of the important benefits of dividends is receiving income while waiting for capital appreciation.

In general, companies that pay dividends are of higher quality and stability than non-dividend paying companies. Quality dividend companies can provide both income and long term growth to those who have long term investment horizons. But you have to be willing to do the homework necessary to properly diversify and buy stocks that are not overpriced.

Dividend Income: Hunting for Yield

Dividend income may be the goal of the investor, but remember it’s only 43% of long term returns. Equally as important is the future growth of those dividends to boost both income and the price of the stock over time.

A common mistake of investors is to look only at the yield and choose stocks with higher yields. Realize that the higher yield may reflect lower quality or lower future growth prospects.

Take a long term view by considering both yield and potential increases in the dividend payout. Remember, if dividends increase, the price of the stock will probably increase with the dividend payout over time. This provides a double power boost to your portfolio; increasing both the dividend yields on your original purchase price and capital gains on your stock.

Dividend Income Investing Warning

You must pay attention to valuation! Dividend stocks were a top performer in 2011. Stock prices are not the bargains they were a couple of years ago. This means you need to be more careful with your purchases. Buying index funds or blindly picking popular stocks can mean you don’t own the best companies or the stocks that offer the greatest value.

Investors should hunt for yield through dividend income investing. However, finding companies that can pay and grow their dividend, as well as purchasing stocks with good valuation, are important aspects of dividend income investing.