When it comes to dividend stocks, quality matters more than quantity. That’s because dividend aristocrats have a history of outperforming the market. Keep reading about why quality matters more than quantity in dividend stocks.
What are dividend aristocrats?
Dividend stocks are a type of investment that pays shareholders a portion of the company’s profits on a regular basis. Commonly known as dividends, these payments can provide investors with a steady income stream and can be a sign that a company is doing well.
There are a few things to look for when investing in dividend stocks. The most important is the dividend payout ratio, which is the percentage of profits that a company pays out as dividends. The higher the payout ratio, the more confident investors can be that the company will continue paying dividends in the future.
Another important metric is the dividend yield, which is the annual dividend payment divided by the share price. This number tells you how much income you can expect to receive from the stock each year. Dividend aristocrats are a select group of publicly traded companies in the United States that have increased their dividends yearly for at least 25 consecutive years. The S&P Dow Jones Indices created the dividend aristocrats list in 2013. As of January 2019, there are 52 companies in the dividend aristocrats index. The index is weighted by market capitalization.
Why does quality matter more than quantity?
So why is quality over quantity important when it comes to dividend stocks? One reason is that dividend growth can lead to capital gains. In other words, if you reinvest your dividends into additional shares of a dividend aristocrat, your total return will likely be higher than if you simply bought and held the stock. Another reason to focus on quality over quantity is that some high-yield stocks may not be as safe as they seem. In contrast, many high-quality dividend aristocrats have yields below 3%. But their payout ratios are much more sustainable, meaning there’s less risk of a payout cut down the road.
How do you start investing in dividend stocks?
There are a few things you need to consider before investing in dividend stocks. First, you need to decide how much risk you are willing to take. Dividend stocks can be riskier than other types of investments because their prices can be more volatile. You also need to decide what you are looking for in a dividend stock. Some investors are looking for stocks that have a high dividend yield. Other investors are looking for stocks that have a history of increasing their dividends.
Once you have decided what you are looking for in a dividend stock, you need to do some research to find the best opportunities. After you have found a few stocks that meet your criteria, you need to decide how much to invest. It is important to remember that you should never invest more than you can afford to lose. Once you have decided how much to invest, you need to buy shares of the stock through a broker or online. Then, you need to decide how to manage your investment.
You can either hold the stock yourself, or you can use a dividend reinvestment plan (DRIP). A DRIP allows you to automatically reinvest your dividends into additional shares of the stock. This can be a great way to compound your returns. Finally, you need to monitor your investment and ensure you are still comfortable with the risk. You may need to sell your shares if the stock becomes too risky or the dividend yield falls below your desired level.