The 3 Rules I Follow in Dividend Investing

Dividends are a great way to generate an extra income stream.

Isn’t it amazing to be paid every month just for holding dividend-paying companies?

I think so! That is why one of my income streams focusses on dividends. I have previously discussed other ways we can generate income here:

With the reality of low-interest rates, we should find other ways to park our money. Money in savings accounts is just losing value every single day and it cannot compete with inflation.

The idea of investing our money and getting a 3,4 or 5% return does sound appealing but we must follow some kind of golden rules and stick to them. Dividend investing, like any other type of investing, does bring risks so we have to try to mitigate them.

Here are my top 3 rules in dividend investing:

Rule #1 — Research

If we wish to do stock picking instead of going the ETF route, we will have to deep dive in the companies we wish to invest. That means we will have to know more about its business model, financial situation and perspectives for the future. Usually, companies disclose most of this info on their own website.

An easy way to get there is to do a Google search with “ Company X investors relations” and voilá!

We can find a lot of valuable information, which might be a little bit intimidating at first but that is part of the investor journey. We need to get familiar with our investment.

This rule is actually applicable to any type of investment. We should educate ourselves first and then put money into it.

Rule #2 — Track Record

Always and always check the company track record. Are we buying uncertainty? Or are we buying a company with a historical record of paying and growing dividends?

A company that has been to increase its dividend year-over-year generally demonstrates good financial management.

“Businesses are just like boats in the open sea, with its ups and downs.”

Companies that have been able to go through economic recessions but managed to keep paying its dividend are a good place to start. Some of them are categorized as “Dividend Aristocrats”, due to the fact that they have paid an annual dividend for the last 25 years. It sounds to me a pretty safe option to put my money on.

Historically these companies have outperformed the general market so that is a plus.

Examples of such companies are Coca-Cola or Jonhson & Johnson. These are generally safe bets so any dips/corrections are buying opportunities. Also, these companies tend to be less volatile than the broad market, which is always a plus.

Another question we must ask is about growth. Have these companies been able to grow their dividends? If so, how often? Growth is an important factor to beat the market so it should be part of our evaluation.

Rule #3 — Diversification

As we keep on adding new stocks to our portfolio, we need to make sure we are not putting all our eggs in our basket. What I mean is that we should not put our focus in only one sector such as Technology and we should spread our investments over several sectors.

Therefore, tracking our portfolio on a regular basis is a good practice to make sure we are not overloading ourselves into a specific sector of the market.

The “Dividend Aristocrats” list you can find here, already gives us different sectors to look at. In case of corrections/recessions, there are sectors which are less sensitive. This is a safety measure to limit a possible downtrend.

These are the basic rules I make sure to follow before jumping into any stock/investment. What’s yours? Please leave your comment below.

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Disclaimer: I am not a financial advisor. Always do your own research when investing in stocks.