Dividend investing involves purchasing shares of companies that are thought to be safe and pay income throughout the year in the form of dividends. Both investing novices and stock market professionals use this strategy. The key is finding a company that is stable, generates cash, and is properly managed. There are several factors to being a successful dividend investor.

Perhaps the most important thing to know is that dividends are not guaranteed. We have only to look back upon the past two years to see this. During 2009, 804 U.S. public companies cut their dividends at a cost of $58 billion to investors. The decision to pay shareholders via cash dividends is made by the company board of directors.

An important tip for any investor is to avoid chasing high yields. Market yields and interest rates have been relatively low over the past ten years. As a result, some investors needed to assume more risk to get their desired yields and subsequently paid the price. If the dividend yield exceeds the broader market average by more than 2.5 times, beware. The market may have concerns about the company’s growth ability or the stock price fell sharply for a reason.

Earnings are attractive but cash is what pays the dividends. Focus on the five-year history of operational cash flow. Subtract any capital expenditures made in each of those years, which leaves you with free cash flow. In addition, review how much was paid each year in cash dividends to make sure it is less than free cash flow.

When selecting dividend stocks for the portfolio, do not forget to diversify. Select a diverse group of strong dividend-paying stocks, rather than investing in ETFs or dividend-themed indexes. There is always a chance that all participants could cut their dividends, leaving the investor in a less than ideal situation.

To learn more about investing in dividends, you can read LearnDividends.com, a website that provides information on investing in dividend stocks.

Keep learning more:

1. The 3 Basic Stock Investing Strategies


2. The Disadvantages of Investing in Bonds


3. What Is Value Investing


4. Bonds Are a Low-Risk, Low Return Investment


5. Why People Invest In Stocks


6. Corporate Bonds 101: An Introduction to Corporate Bonds


7. The Advantages of Investing in Mutual Funds

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