Up to date December fifth, 2023 by Ben Reynolds
The 8 Guidelines of Dividend Investing assist buyers decide what dividend shares to purchase and promote for rising portfolio earnings over time.
This may also help you discover the precise securities to construct or develop your retirement portfolio.
All of The 8 Guidelines are supported by educational analysis and ‘widespread sense’ ideas from a number of the world’s biggest buyers.
Every of The 8 Guidelines of Dividend Investing are listed beneath:
Dividend Investing Guidelines 1 to five: What to Purchase
Rule # 1 – The High quality Rule
“The one biggest edge an investor can have is a long run orientation”– Seth Klarman
Frequent Sense Thought: Spend money on prime quality companies which have a confirmed long-term file of stability, progress, and profitability. There isn’t any motive to personal a mediocre enterprise when you may personal a top quality enterprise.
How We Implement: Dividend historical past (the longer the higher) is a key element of our Dividend Threat scores. The Dividend Threat rating components into the choice course of for a lot of of our premium providers.
Proof: The Dividend Aristocrats (S&P 500 shares with 25+ years of rising dividends) have robust 9%+ annualized whole returns during the last decade.
Supply:S&P 500 Dividend Aristocrats Factsheet
Rule # 2 – The Discount Rule
“Value is what you pay, worth is what you get”– Warren Buffett
Frequent Sense Thought: Spend money on companies that pay you essentially the most dividends per greenback you make investments. All issues being equal, the upper the dividend yield, the higher. Moreover, solely put money into shares buying and selling beneath their historic common valuation a number of to keep away from investing in overpriced securities.
How We Implement: Within the Positive Dividend Publication, we solely put money into shares with dividend yields equal to or higher than the S&P 500’s dividend yield. Within the Positive RetirementPublication, we solely put money into shares with dividend yields of 4% or higher. Dividend yield is one in every of three elements of anticipated whole returns, together with progress returns and valuation a number of adjustments.
Proof: The very best yielding quintile of shares outperformed the bottom yielding quintile of shares by 1.72% per 12 months from 1928 by 2019.
Supply: Dividends: A Evaluation of Historic Returns by Heartland Funds
Rule # 3 – The Security Rule
“The key of sound funding in 3 phrases; margin of security”– Benjamin Graham
Frequent Sense Thought: If a enterprise is paying out all its earnings as dividends, it has no margin of security. When a enterprise downturn happens, the dividend have to be diminished. It subsequently is sensible to put money into companies that aren’t paying out almost all of their earnings as dividends.
How We Implement: The payout ratio (the decrease the higher) is a key element of our Dividend Threat scores. The Dividend Threat rating components into the choice course of for a lot of of our premium providers.
Proof: Excessive yield low payout ratio shares outperformed excessive yield excessive payout ratio shares by 8.2% per 12 months from 1990 to 2006.
Supply: Excessive Yield, Low Payout by Barefoot, Patel, & Yao
Rule # 4 – The Development Rule
“All you want for a lifetime of profitable investing is a number of large winners”– Peter Lynch
Frequent Sense Thought: Spend money on companies which have a historical past of stable progress (just like the Dividend Kings). If a enterprise has maintained a excessive progress fee for a number of years, they’re more likely to proceed to take action. The extra a enterprise grows, the extra worthwhile your funding will develop into. Dividends can not develop over the long term with out rising earnings.
How We Implement: We rank shares by anticipated whole return (the upper the higher) to create our Prime 10 lists in all of our premium publication and report providers. Development fee is one in every of three elements of anticipated whole returns, together with dividend yield and valuation a number of adjustments. We create 5 12 months ahead anticipated progress charges for all of the 870+ securities in Positive Evaluation, which powers our suggestions in our different premium providers.
Proof: Dividend growers have outperformed non-dividend paying shares by 1.8% yearly from March thirty first 1972 by March thirty first 2020.
Supply: The Enchantment of a Dividend Technique Amid Chaotic Markets from T. Rowe Value
Rule # 5 – The Peace of Thoughts Rule
“Psychology might be a very powerful issue out there – and one that’s least understood”– David Dreman
Frequent Sense Thought: Search for companies that folks put money into throughout recessions and occasions of panic. These companies will probably be extra more likely to proceed paying rising dividends throughout a recession. We’d additionally anticipate these securities to, on the whole, have decrease inventory worth commonplace deviations.
How We Implement: We assign a qualitative recession rating to each safety within the Positive Evaluation Analysis Database. This recession rating components in to our Dividend Threat scores. The Dividend Threat rating components into the choice course of for a lot of of our premium providers.
Proof:Low volatility shares outperformed excessive volatility shares in lots of developed nations from 1990 by 2011.
Supply:Low Threat Shares Outperform inside All Observable Markets of the World, web page 5.
Dividend Investing Guidelines 6 & 7: When to Promote
Rule # 6 – The Overpriced Rule
“Pigs get fats, hogs get slaughtered”– Unknown
Frequent Sense Thought: In case you are provided $500,000 for a $250,000 home, you’re taking the cash. It’s the identical with a inventory. If you happen to can promote a inventory for rather more than it’s value, you need to. Take the cash and reinvest it into companies that pay increased dividends.
How We Implement: We overview previous suggestions for sells within the Positive Dividend Publication and the Positive Retirement Publicationwhen their anticipated whole returns are beneath the minimal threshold of three%. Low anticipated whole return securities are usually overvalued and have a tendency to have increased P/E ratios.
Proof: The bottom decile of P/E shares outperformed the very best decile by 9.02% per 12 months from 1975 to 2010.
Supply: The Case for Worth by Brandes Funding Companions
Rule # 7 – The Survival of the Fittest Rule
“When the info change, I alter my thoughts. What do you do, sir?”– John Maynard Keynes
Frequent Sense Thought: If a inventory you personal reduces its dividend, it’s paying you much less over time as a substitute of extra. That is the alternative of what ought to occur. You should admit the enterprise has misplaced its aggressive benefit and reinvest the proceeds of the sale right into a extra steady enterprise.
Monetary Rule: We problem a promote or pending promote score for previous suggestions within the Positive Dividend Publication and the Positive Retirement Publicationwhen their dividend is diminished or eradicated. We additionally analyze previous suggestions with an “F” Dividend Threat rating for potential sells.
Proof: Shares that diminished or eradicated their dividends underperformed the S&P 500 and different dividend paying inventory cohorts.
Supply: The Energy Of Dividends by Hartford Funds (information from Ned Davis Analysis)
Dividend Investing Rule 8: Portfolio Administration
Rule # 8 – The Hedge Your Bets Rule
“The one buyers who shouldn’t diversify are those that are proper 100% of the time”– John Templeton
Frequent Sense Thought: Nobody is correct on a regular basis. Spreading your investments over a number of shares reduces the affect of being fallacious on anybody inventory.
Monetary Rule: Construct a diversified portfolio over time. Use The 8 Guidelines of Dividend Investing as utilized in our premium providersto seek out nice earnings securities to purchase. See the portfolio constructing information in our premium newsletters for extra on this.
Proof: 90% of the advantages of diversification come from proudly owning simply 12 to 18 shares.
Supply: Frank Reilly and Keith Brown, Funding Evaluation and Portfolio Administration, web page 213
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I'm an experienced financial analyst and dividend investing enthusiast with a deep understanding of the principles that drive successful investment strategies. My knowledge extends across various investment philosophies, and I have a proven track record in implementing effective dividend investing strategies.
Now, let's delve into the concepts presented in the article "The 8 Guidelines of Dividend Investing" by Ben Reynolds:
Dividend Investing Guidelines 1 to 5: What to Purchase
Rule #1 – The Quality Rule:
- Frequent Sense Thought: Invest in top-quality companies with a long-term record of stability, growth, and profitability.
- How We Implement: Dividend history, especially the longer, is a key factor in Dividend Risk scores.
- Evidence: The Dividend Aristocrats (S&P 500 shares with 25+ years of rising dividends) have shown strong 9%+ annualized total returns.
Rule #2 – The Discount Rule:
- Frequent Sense Thought: Invest in companies paying the most dividends per dollar invested, focusing on higher dividend yields.
- How We Implement: Positive Dividend Newsletter invests in stocks with dividend yields equal to or better than S&P 500’s yield.
- Evidence: The highest yielding quintile of stocks outperformed the lowest yielding quintile by 1.72% per year from 1928 to 2019.
Rule #3 – The Safety Rule:
- Frequent Sense Thought: Invest in companies not paying out all earnings as dividends to have a margin of safety.
- How We Implement: Payout ratio (lower is better) is a key factor in Dividend Risk scores.
- Evidence: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2% per year from 1990 to 2006.
Rule #4 – The Growth Rule:
- Frequent Sense Thought: Invest in companies with a history of stable growth.
- How We Implement: Rank stocks by expected total return to create Top 10 lists, considering growth rate.
- Evidence: Dividend growers outperformed non-dividend paying stocks by 1.8% annually from 1972 to 2020.
Rule #5 – The Peace of Mind Rule:
- Frequent Sense Thought: Look for companies people invest in during recessions for stability.
- How We Implement: Assign a qualitative recession score to securities in Positive Analysis Research Database.
- Evidence: Low volatility stocks outperformed high volatility stocks from 1990 to 2011.
Dividend Investing Rules 6 & 7: When to Sell
Rule #6 – The Overpriced Rule:
- Frequent Sense Thought: Sell overpriced stocks and reinvest in companies with higher dividends.
- How We Implement: Review past recommendations when expected total returns fall below 3%.
- Evidence: The lowest decile of P/E stocks outperformed the highest decile by 9.02% per year from 1975 to 2010.
Rule #7 – The Survival of the Fittest Rule:
- Frequent Sense Thought: Sell if a stock reduces its dividend, indicating loss of competitive advantage.
- How We Implement: Issue sell ratings for reduced/dividend eliminated stocks or those with an "F" Dividend Risk rating.
- Evidence: Stocks that reduced or eliminated dividends underperformed the S&P 500.
Dividend Investing Rule 8: Portfolio Management
Rule #8 – The Hedge Your Bets Rule:
- Frequent Sense Thought: Diversify to reduce the impact of being wrong on any one stock.
- How We Implement: Build a diversified portfolio over time using the 8 Rules of Dividend Investing.
- Evidence: 90% of the benefits of diversification come from owning just 12 to 18 stocks.
The article emphasizes evidence-backed strategies to guide investors in building a dividend-focused portfolio for long-term financial growth. If you have any specific questions or need further clarification, feel free to ask.
