What’s The Best Dividend Investment Strategy?

I have been working on creating a passive income source. And I think, dividends from stocks are a great passive income source. You get paid literally while you sleep. Sorry, that was not true. But you get my point. You buy stocks of great businesses. And you wait. Every quarter you get your share of the dividend.

While stocks are pieces of ownership in a business. But as a minority shareholder, you do not do anything other than owning the share in portfolio. By the way, I have user e-Trade, Robinhood and Webull. I prefer Robinhood, you can find out more about Robinhood here in one of my posts and I have another post comparing Webull and Robinhood, you can check that one out too. Currently, I do not use eTrade. Since Robinhood and Webull are free, why would I pay money to buy stocks?

What’s The Best Dividend Investment Strategy? Essentially there are 3 strategies, first is low growth, high dividend, medium growth, medium dividend and finally fast growth, low dividend. The names are self-explanatory. Now let me elaborate on these further. 

What are the benefits of slow growth and high dividend strategy?

The first option is low growth, high dividend – I am actually following these stocks. When I read Buffet, what I figured, 2 things played huge role in his investment success. First is buying stocks with high cash flow. Avoiding tax and using Berkshire’s float. In other words, BRK is an insurance company, the premium they collected was used to invest. The premium was interest-free money.

That is why I am interested in high dividend stocks. Now, there are a few benefits. Savings account in DCU pays me 5% on first $1000 and Betterment Savings account pays me 2.3%, while Capital One pays me 0.85% in savings. But, my BP and Royal Dutch Shell that I hold in my Robinhood have a yield that is more than 6%.

These companies are not growing that fast, these are huge energy company. And those are slowly transforming themselves, as they are entering green energy space? But, their dividend is safe, as cash flow is stable. And as I hang on to those stock, the dividends I will receive will be qualified. so the tax rate on those dividends will be less.

One drawback that I see is, I do not expect the cash flow to go up by a huge amount, so I do not expect the dividend to go up by a huge amount either.

Why MLP and REITs might not be the best options?

MLPs and REITs usually pay more than 6%. And you will get plenty of options. but, few things you need to aware of.

These dividends are not qualified, not even in IRA, so you pay the maximum tax on those dividend earnings. REITs and MLPS are sensitive to energy price and interest rate. REITS are not sensitive to energy but they are sensitive to the interest rate. Both MLP and REIT take a lot of debt to grow, which becomes a problem when interest rates go up.

Which stocks pay a monthly dividend?

I found at least 12 stocks which pay a monthly dividend, I am not recommending these to you, these are just for your information

Ticker Name Sector
APLE Apple Hospitality REIT Real Estate
CLDT Chatham Lodging Trust Real Estate
ERF Enerplus Corporation Energy
EPR EPR Properties Real Estate
IPPLF Inter Pipeline Ltd. Energy
LTC LTC Properties Real Estate
MAIN Main Street Capital Corporation Financials
PBA Pembina Pipeline Corporation Energy
PSEC Prospect Capital Corporation Financials
O Realty Income Corporation Real Estate
RIOCF RioCan Real Estate Investment Trust Real Estate
STAG STAG Industrial Real Estate

As I mentioned before if these are limited partnership or real estate trust, then this dividend will not be qualified. If you want to understand the differences between qualified and unqualified dividends then you can check a post of mine here.

How to identify good dividend-paying stocks?

This is where you do the job. You need to research. Or you need to let someone else do the research for you. I have a post describing what you need to look for in a business, that you can read here.

In short, look for meaning, management, and moat. Why do you like a business? ( well other than the dividend yield). Ask yourself, if you are a user of their product or service? Do you like it?

Then look for the financial ratios, return of equity, return on capital. How much debt the company has? Once you are happy with the return ratios and hopefully low to no debt, then check the moat the business has.

How strong is the brand? Does it have a patented product? When does the patent expire? Does it have brand loyalty? Brand recall?

These are very basic checks to make sure you understand the business and you want to own it for the long term. You should never pick a company just because the dividend yield is high. In many cases, high yield is a trap. You can read my post here, to understand why high yield can be a red flag.

One last thing you need to check is the payout ratio. It tells us what percentage of free cash flow the company pays out the shareholder as dividends.

Although checking payout ratio for REITs is meaningless. Because you will often see more than 100% payout ratio. Mostly because the depreciation in real estate helps REIT generate ton of cash flow. you can read in detail here.

IS there any shortcut to success?

I would suggest simply safe dividends. They have pretty good service that shows you different category and dividend safety and where you can expect growth. I think you should check out their site.

You should keep an eye on fool.com , forbes.com, yahoo finance for free recommendations. But you should still do your research. These are mostly some recommendations, and you will never know if the dividend is safe or if there is any chance of capital appreciation. Hence I suggest those services where you basically outsource the research work.

Let me know if you have any question down in the comment box.