Dividend investing can be considered as the most effective and time proven method, in order to get the superior returns over longer time period. Many investors these days invest in dividend paying stock to enjoy steady and regular payments. This payment is further used by investors for purchasing additional dividend stocks of that particular company. Many dividend paying stocks stand at the lower risk level, therefore it can be considered as the valuable, appealing and profitable investment for the young investors as well as for investors who are approaching their retirement stage. As investing in the dividend stocks is a great method of generating income for young investors at the same time it is capable of providing the retirement income to the old investors too.
In order to start investing in the dividend stocks, investors need to follow these instructions.
- Investors should get the Pan card first.
- Investors should apply for the Demat Account.
- Some trading books should be bought by the investors so as to get extra knowledge.
- Investors should practice paper trading.
- Investors should follow 20 to 30 blue chip stocks everyday as it will improve the prediction of the investors about the growth of the stocks.
- Now the investors can freely start investing in the dividend stocks for earning the cash payments from the dividends.
Eight rules must be followed by the investors in order to invest in dividends smartly. These are
Rule 1: Quality
It says that the investors should invest in the high quality business which possesses the history of long term stability, profitability and growth. Mediocre business should not be owned by the investors even when they are capable of owning good quality business. The stocks which have the record of steady dividend for 25 years or more than that can be said as a good choice for becoming the part of portfolio.
Rule 2 : Bargain
Income is the main reason behind any investments made by investor; therefore investors should invest money in those businesses that pay good returns, in order to increase the dividend income stream. The stocks should be ranked by their dividend yield.
Rule 3 : Safety
The business that pays out all its income as dividends has no margin of safety. During the time of the downturn of the business, the dividends are often decreased. Therefore it is necessary that the investments should be done in the businesses that possess higher income than the dividends. Applying such investment policy will help you to get ensured that dividend is not going to be decreased during the downturn of the business. In this case the stocks should rank on the basis of the payout ratios.
Rule 4 : Growth
The businesses with the solid growth history are always good for making an investment. In case if the high growth has been maintained by the business for past many years, then they must continue to do so. The dividend payout depends upon the growth of the business hence it will surely increase with the increase in the growth of the business. In this case the stocks should be ranked on the basis of the dividend growth.
Rule 5 : Peace of mind
The investors should search for those businesses that guarantee stable income to investors even at the time of recession and panic. Such kinds of businesses will probably have relatively stable stock price that will be helpful in making good income on long term basis. In this case the stocks should get their ranking on the basis of their beta and long term volatility.
Rule 6 : Overprice
The business of the stock investing is simply done for earning regular income with stable profit. Therefore if the investor can sell a stock for the price which is higher than the worth of the stock, then he should not bother about anything and should sell it. The earned money should be reinvested into that stocks which will offer higher dividends. The investors should sell the stock only when the normalized P/E ratio value is above 40.
Rule 7: Survival of the fittest
If the stock owned by investor is not giving the desired amount of dividend and or there is a reduction in dividend over certain time period then this means the stock is not favorable to the investor. Therefore the investors should look for more stable stock by reinvesting the proceeds of sale into good dividend yielding stock. In this case the investors should sell the stocks when the associated payment of dividend is reduced significantly.
Rule 8: Hedge the bets
Nothing can be perfect and nobody can be right every time. Therefore the diversification of the portfolio with different dividend stocks and other assets is always preferable and profitable. Spreading of the investments over the multiple stocks always reduces the risks and the impact of the incorrectly chosen stock. It must be noted that almost 90% profits of the diversification of the portfolio come from the purchasing of 12 to 18 stocks.