How To Start Investing In Dividend Stocks


How To Start Investing In Dividend Stocks – In this blog post, I break down my strategy for investing in dividend stocks into five basic steps. These steps create a solid foundation upon which all the finer details are built. built up.

Note: If you’re new to dividend investing and aren’t sure if it’s right for you, you might want to read this post first: Pros and Cons of Savings vs. Dividends for Retirement Income

How To Start Investing In Dividend Stocks

How To Start Investing In Dividend Stocks

I’ll start with step zero, which is thinking like a business owner. This is not really a step; It is based on a philosophy that focuses on five steps.

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If you’ve been investing for a while, thinking like a business owner might be obvious, but for less experienced investors, it’s not.

For example, when I started investing in the mid-1990s, the only thing I knew about the stock market was what the evening news told me. And what the news tells me is that the FTSE 100 went up or down a little that day or that the share price of a big company went down because the company lost or had bad publicity.

So, like most novice investors, my focus is on stock prices and their movements from one day, week or month to the next.

Ultimately, I learned that putting stock price movements front and center is a terrible idea because it ignores the fact that shareholders own the business.

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This is very important because thinking of yourself as a business owner should fundamentally change the way you think about investing.

Suppose you win the lottery, and in a moment of madness, you immediately buy Marks & Spencer. Now that you’re a real M&S owner, what information are you interested in? Will you spend most of your time worrying about stock prices?

The answer is that you will not because if you own M&S immediately, you will own all the shares, and the share price will not have a price (because the price only happens when there are buyers and sellers, and if you own all the shares and are not ‘t looking to sell, there will be no seller to negotiate the price with).

How To Start Investing In Dividend Stocks

These business fundamentals are what business owners focus on because it is how they measure the progress of the company they own. These basics also help business owners value their business, just in case someone wants to get business from them (I’ll have more on company valuation in a later step).

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As stock market investors, we are business investors. On that basis, almost all of our focus should be on the fundamentals of the business in which we invest in the short-term, rather than the short-term increase in share prices.

Most dividend investors are after a good combination of dividend yield and growth, so my approach is to focus on high-quality companies that are likely to pay increasing dividends over many years and, preferably, decades.

Not all companies can produce sustainable dividend growth in the long term, and companies that do often have two important characteristics: quality and protection.

In conclusion, most quality companies have a competitive advantage that lasts over their peers. These competitive advantages enable them to continuously gain market share or expand into new markets frequently over decades.

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The acid test for quality companies is that they generate consistent profits and consistently high returns, where “capital” is the financing of the company by investors (in the form of shareholder shares), lenders (as loans) and landlords (as leases. Properties). The capital is then used to finance offices, shops, warehouses, technology, vehicles and so on, and the objective, of course, is to generate attractive returns from those assets.

For a simple example, if a company buys a factory for 1 million pounds and the factory makes a profit of 200,000 pounds per year, then the 1 million pounds invested in the factory is getting an annual return of 20% which is good. (It’s more complicated than that, but that’s the general idea).

High profitability is necessary because it allows quality companies to finance their growth with low-risk profits rather than high-risk debt. The best companies can capitalize on strong growth commensurate with little debt while paying steadily increasing dividends.

How To Start Investing In Dividend Stocks

As I just mentioned, quality companies produce high profits, which can be used for dividends and growth, so quality companies often have relatively consistent growth records across revenue (sales), income (profit), dividends and capital (buildings, machinery, warehouses, etc.).

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This growth usually occurs when a quality company takes market share from a weaker competitor or moves into an adjacent market that is closely related to its core business.

If you want to win at the highest level in any sport, it will take a combination of talent and years of expert training. Winning in business is no different.

Quality companies that consistently win, in most cases, have spent decades focusing on narrow capabilities, providing customers with a limited set of products and services.

Therefore, if you are looking for a quality company, you should look for a business that has a narrowly focused core business for at least a decade.

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There are many types of competitive advantage, but most quality companies have at least one of these four:

A quality bag should be worth a lot, but if it’s so fragile that the slightest touch breaks it, it may be in pieces and worthless when you take it to auction.

The same can be said of quality companies. If a company is so fragile that it breaks when the economy hits the road, its durable competitive advantage is worthless.

How To Start Investing In Dividend Stocks

Therefore, in addition to quality, I also look for strong companies, or defenses, in three ways:

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The most obvious form of hedging is that the company operates in the hedging market. In other words, it operates in a market that is relatively insensitive to economic ups and downs. Think about how bad the economy is before you stop buying toothpaste. On the other hand, if there are signs that the economy may be slowing, it is very easy not to buy a new car or a new house.

Imagine a highly competitive, high-quality company operating in a market immune to economic ups and downs. It looks good, but what if its main market declines in the long run? Eventually, a shrinking market will bring the company down, and that’s not what I call a hedge.

Because, it is a good idea to focus on companies that operate in markets with long-term growth potential.

Like the vase I mentioned above, some companies are just fragile. This usually happens because they have too much debt, but there can be other reasons, such as a pension scheme that is too large, or perhaps they rely too much on a single customer, supplier or superstar employee. Or perhaps they are facing sudden technological or regulatory changes.

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In summary, the ideal dividend growth portfolio combines quality (durable competition) with defense (strength), and the combination of these two factors should make long-term dividend growth possible.

When we buy stocks, we are buying a business, and if we are going to buy that business, we should have a good idea of ​​what that business is worth. In other words, we should have a good idea of ​​its fair value.

The first thing to know is that the fair value of a business depends only on future cash returns to shareholders.

How To Start Investing In Dividend Stocks

Cash is often returned to equity holders, but the principle applies to other types of cash returns such as share buybacks (when a company pays you cash in exchange for your shares). To simplify things, I’ll lump all cash returns together and just call them “dividends”.

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Some people have a hard time believing that companies derive their value solely from future dividends, so I’ll try to explain with a thought experiment:

Company A will pay dividends this year and then go bankrupt next year, causing its share price to drop to zero. Company B will

The answer is definitely Company A, because even if both companies eventually become worthless, at least you will receive a dividend from Company A before it goes bust.

In fact, you’d be crazy to pay Company B because no matter how little you get for it, you won’t get it back.

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This tells us that the company gets its value from the cash it returns to shareholders, and from other sources.

So, even if companies don’t return cash to shareholders today (like most high-growth tech companies) investors must assume that those companies will, at some point in the distant future, start paying dividends or buying back shares.

When we realize that the value of a company comes from its dividend, the next obvious question is how much is a particular company worth?

How To Start Investing In Dividend Stocks

This is very simple. If you have the choice of getting £10 or £100, which do you want (in other words, which do you think is more.

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If you had the choice of getting £100 today or £100 in a year, which would you choose?

Again, it is

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