Income investing is perhaps one of the most straightforward stock-picking strategies. It is mostly because it aims at picking companies that provide a steady stream of income. A lot of times, investors only think about fixed-income securities such as bonds in the instance where they would like a steady income. However, stocks can also provide a steady income by paying a solid dividend. In this article, we would look at the strategies that focus on these kinds of stocks.
Stock-picking categories: Who Pays the Dividends?
A lot of investors end up on focusing on more established and older companies. These companies have reached a certain size and are no longer able to sustain higher levels of growth. Thus, they are no longer in rapidly expanding industries.
Hence, instead of reinvesting retained earnings into themselves, they do something else. Many growing companies tend to do this. However, mature companies pay out retained earnings as dividends as a way to provide a return to their shareholders.
Stock-picking categories: Dividend Yield
Here’s one thing to know about income investing. It is not about investing in companies with the highest dividends (in dollar figures). What is more important is dividend yield. It is mostly calculated by dividing the annual dividend per share by share price. Thus, it helps gauge the actual return that a dividend gives the owner of the stock.
For example, a company that has a share price of $100 and a dividend set at $6 per share has a dividend yield of 6%, or 6% return from dividends. Most companies have a dividend return of 2-3%
However, income investors want way higher yield than 2-3%. They are mostly looking for a minimum 5-6% yield. Thus, it means that on a $1-million investment it will produce an income (before taxes) of $50,000-$60,000. The main reason behind this strategy is becoming pretty clear. Best is to find good companies with sustainable high dividend yields. Then, you are sure to receive a steady and predictable stream of money over the long term.
Stock-picking strategies: Additionally
Also, you can look at the company’s past dividend policy. This way, you can determine whether a growing company can continue with its dividends. Thus, if a company has recently increased its dividend, be sure to analyze that decision. For instance, a large increase, say from 1.5% to 6%, over a short period such as a year or two, may not be a good idea. Most times, they do not have a long-lasting span. This basically means that such companies can’t keep up with such dividend in the future. However, the longer a company has been paying a good dividend, the more likely it will continue to do so in the future. Thus, companies that have had steady dividends over the past five, 10, 15, or even 50 years are likely to continue the trend.
Stock-picking strategies: So many examples are here!
So many companies out there pay really good dividends. This is also adding to the fact that it grows at a considerable rate. One of the best examples is Johnson & Johnson. From 1963 to 2004, Johnson & Johnson has been able to successfully increase its dividend every year. In fact, if you bought the stock in 1963 the dividend yield on your initial shares would have grown approximately 12% annually. Thus, after thirty years, for instance, your earnings from dividends alone would have rendered a 48% annual return on your initial shares![/read]