Dividend Investing Strategy For Long-Term Outperformance

The good news is that those who wish to harness the power of the stock market can build long-term wealth and over time gain financial independence. For this reason, it is a good idea to develop a dividend investment strategy and stick to it. If your goal is to create a reliable source of income, your dividend investment strategy should focus on high quality companies with yields and growth. 

Buying shares in companies that pay a stable dividend is one of the best ways to invest. They can also invest in slower, steady payments from more mature companies called dividend investing, which can be just as boring. Whereas previous generations of investors preferred dividend investing because they enjoyed the higher returns available today, there are still many benefits of a dividend-investing strategy. 

Buying shares that pay dividends is one of the most popular and successful investment strategies. A portfolio of dividend shares and other income-generating assets can provide you with financial independence when you retire or allow you to retire early. 

In this post, we will discuss some of the factors to consider when investing in dividend shares, the most popular investment strategies and common mistakes to avoid. Dividend investing is a long-term investment strategy, so it is important to develop a process for the picking of shares to manage your portfolio. The first step in this process is to create a watchlist of stocks that pay dividends. 

Owning dividend growth stocks can help separate long-term total returns from the market vagaries. Instead of worrying about the performance of your portfolios on any given day of the year, keep an eye on the dividend lists. High dividend yields are one way to exploit investors "overreactions. 

My colleague Reality Shares examined Bloomberg data from 1992 to 2016 and found that companies with high dividend yields outperformed the stock market broader in terms of total return on average. The highest yielding stocks achieved a return of 8.1 percent, while the lowest yielding stocks achieved a whopping return of 40.3 percent. In the white paper entitled "The High Dividend Yield Return Advantage," high-dividend stocks performed better than the market in general. 

They cite work done by Jeremy Siegel in his book The Future of Investors on high-yield US equities. Dividend-paying companies that grow year on year, cover their expenses and have more cash flow than in previous years are candidates to invest in dividend growth. These companies increase the dividends they pay to their shareholders as a result of their continued growth. 

This also means that companies with a longer history of investing in their business will have a more sustainable cash flow, thus they are more likely to increase dividends. A moderate dividend also makes it easier for a company to increase its dividend, because there is more room for growth. 

If a company does not grow much, the stock can be valued higher than other companies with lower dividend yields. Investors with a longer horizon should focus on buying shares in companies that are growing and paying below-average dividends. 

Dividend investing can be a loss-making experience for a few years, but the prospectus theory says this adds significant value to an investor's experience. In other words, as an investor with dividend growth, the dividends you receive are tangible and lasting, and the benefits of a crash can be reversed. 

It may seem counterintuitive, but companies that pay and raise dividends consistently perform better than stocks without dividends, increasing the attractiveness of dividend growth investors. By reinvesting the dividends you reinvested in high-quality dividend growth stocks in times of stock market crash, you will be better equipped to meet your growing dividend income stream by reinvesting at lower post-crash prices and securing higher returns. 

Because dividends are derived from a company's profits, they can be assumed to be a sign of financial health in most cases. Shares and investment funds that pay dividends are more likely to have solid financial foundations than those that are not. Investors should be aware, however, that high returns have an inverse relationship to share prices, and that dividend payouts are not always sustainable. 

Investors buy established companies with a history of good dividends adding stability to a portfolio from an investment strategy perspective. Many investment legends such as John Bogle, Warren Buffett and Benjamin Graham favor buying shares that pay dividends as a critical part of the total capital return. The value of purchasing shares with dividends is that it helps cushion the fall of actual share prices and provides an opportunity for stock prices to appreciate, coupled with a steady stream of dividend income. 

It may seem counter-productive at first, but if you end up cashing a large total dividend cheque and own it, you will get share A and end up with a higher net present value of share B, which will give you more money that will work for you over the long term. 

For many investors, regular dividend income is a solid and safe way to build a nest egg. If you own a stock worth $100, an annual dividend yield of 5% means that the company pays you 5% dividend income per year. In today's dividend madness, this is a fantastic passive income stream, and that is what dividends are supposed to provide.