Dividends investing is a sub-set of equity investing that requires patience, discipline and an appreciation of cash flows. It is certainly not sexy but, because of the cash-rich nature of the product, it appeals to people with a steady-eddie approach to investing.  If you want to become a dividend investor, what are some ideal steps to take?

Educate yourself

There is no single bible of dividend investing but The Ultimate Dividend Handbook is a good start into the ins and outs of dividend investing. There are also many great dividend blogs out there. I would suggest  the following three as a starting point (but, again, there are a lot of great dividend investing blogs). The Dividend Guy is one of the older blogs on the topic and one of the “elders” of the blogging world on this topic. Dividends4life always conducts good fundamental analysis on dividend paying stocks. Money Gardener is not so much a pure dividend blog but one of its major themes is about dividend paying stocks and he shares his thought processes on what it takes to be a good dividend investor.

..then there’s Derek Foster who is a bit of a lightning rod of controversy (or what passes as such in the personal finance blogsphere) by claiming he’s the country’s youngest retiree by living off dividend income. A lot of the focus has actually been on Foster himself and not his methodology so keep that in mind.

…and in a shameless plug, I have a section on dividends which I tend to add to approximately one post a week.

Be a consistent investor

There is some dispute whether dollar cost averaging is actually as wonderful as the financial industry makes it out to be. In the case of dividend investing, I believe it is important to be a consistent investor regardless of share price. At the end of the day, your bird in the hand in dividend investing is your dividend payment. Thus, you are purchasing a cash flow and not an appreciation per se. Assuming that the dividend is sustainable, a cash flow at lower value (i.e. the share price has fallen) means you have gotten more for less.

My point being that dollar cost averaging is typically pitched to purchase mutual funds but it make be more appropriate in the dividend investing context. The key being, of course, setting a tolerable amount of sum to invest and to doing it consistently.

How? Set up a share subscription plan with companies that offer this service- in order words, you are buying stock directly from the company and not a broker (saving you significant transaction fees). The service is usually administered by a transfer agent. You set up an amount you are willing to invest each month (there are minimums) and regular share purchases are made (here is an example of a share subscription plan from Scotiabank).  If you want to know whether a company has a share subscription plan, please check their investor relations of their website (anyone know of a blog that lists who offers share subscription plans)? Foster’s book, The Lazy Investor, also discusses this process in detail.

The question always gets asked whether you should take your dividend in cash or in more shares (i.e. a dividend reinvestment plan or a DRIP). It depends on your life situation. Technically speaking, The Ultimate Dividend Handbook found that, over time, you are further ahead if you invested in a DRIP than cash. But some many have more pressing needs for the money.

Be patient

Dividend investing, in normal circumstances, is very much a  buy and hold strategy. Assuming you have invested in the right companies, you really only have to check periodically to see how they are performing since you know cash is coming in the door every quarter.

2008 did see one of the worst years in terms of companies slashing their dividends. Is this the end of the bad news and have we hit bottom? No one knows but the companies who may slash dividends again are frequently cited now in the media and blogs so there is a fair bit of warning now (and a well-grounded education in dividend investing will teach you how to spot companies in danger of slashing their dividends- no worries, I will post on this topic!)

Pick some dividend yield stocks

Notice I put product last? It is deliberate. The key is to educate yourself first, develop the right mind-set and then look for product (which is actually the theme for this entire week’s post- education and mind-set are more important than product). I don’t favor any one stock over another. To me, a dollar from dividend payments is a dollar from dividend payments regardless it is from a bank, utility, railways, insurance company etc.

If you can’t decide, you can always purchase an exchange traded fund tracking dividend yield stocks.

I would look at many of the blogs cited above for ideas on specific products or companies.

…next week, my dividend topic deals with how companies can have dividend payout ratios over 100% of earnings.