The following is a guest blog post:
Almost all investment experts would recommend that the best way to earn from investments is to place money on long-term opportunities or to wait at least 10 years to help increase the chances of larger returns rather than filling up your portfolio with short-term assets (i.e. bonds, mutual funds). Thus, many investment resources often suggest diversifying investment portfolios with high-quality dividend paying stocks. Doing so has been proven to be an effective way for investors to yield high long-term returns that can be depended upon even when they reach their retirement age.
However, this method of investment is ideal for individuals that are in it for the long run and prefer to re-invest dividends back into companies after payouts. For first-time dividend investors, FutureAdvisor listed the following notable benefits of investing long-term in dividend paying stocks:
1. It can be rewarding with a total return of up to 45 percent if you re-invest.
2. You will have a huge number of shares, which is equivalent to more income by the time you retire.
3. Dividends are considered less volatile compared with earning over time.
4. Businesses that offer dividend stocks are commonly established in their own fields thus are able to ride tough market changes.
However, dividend growth investment requires the need to execute a lot of methodologies to be able to yield high returns. In this post, we will list down the important investing tips every dividend growth investor should research to be able to help their portfolio gain long-term success.
Focus on the total return
Stocks that yield high returns do not immediately equate to better total returns as the latter depends on the output of capital appreciation and the performance of the dividend. But, don’t dismiss dividend yields. The highest yielding stocks have the maximum payout ratios, although it also denotes less cash to re-invest with slower than usual future dividend growth. The best approach is to focus on the total returns instead of high yields because you need to remember that dividend growth is more centered towards the future output than the present.
Since dividend growth isn’t time sensitive, you should be patient when considering your long-term strategies. You must be able to hold your stocks for a long period of time, even when the value falls during bear markets. By quickly buying and selling, it might cost you higher than necessary due to frictional costs brought about by brokerage fees and taxes, and then you won’t benefit from the compounding effects of high quality dividends. Luckily, as stock prices fall during recessions, high quality dividend growth stocks continue to produce great payouts. Take note that companies that make solid returns year-on-year build real wealth over long periods of time.
In an interview by Reuters, renowned investment guru Jeremy Grantham said, “Be patient and focus on the long term… Now all you have to do is withstand the pain as the very good investment become exceptional. Individual stocks usually recover, entire markets always do.”
Always calculate risks
Aside from being patient, investors also need to understand when they must invest and when to cut their losses, which are the same traits exhibited by the best traders in the industry. FXCM explained that traders also need to know their trading personality, which in your case, is your investing personality. Ask this pertinent question: “How risky am I?” – this will determine the kind of investment style that you need to maintain and the best strategy to gain success. Just like any investment opportunity, dividend growth investing also requires calculated risks and relies heavily on instinct. As an investor, you must be able to cut losses and let profits run. While human psychology suggests that people tend to hang on to their losses, you must be able to pre-determine the amount of risk and profit to prevent human emotion from affecting your investment decisions.
Lastly, it’s vital to adhere to a well set out plan of action (i.e. dividend income you need, investment method to follow), since dividend growth investment is best approached systematically. Hopefully, you are now ready to take your investment portfolio to new heights with the aforementioned tips. Good luck!
Disclosure: I do not recommend any decision to the reader or any user, please consult your own research. Thank you for your understanding.