Dividend Strategy

Motley Fool  Sep 7  Comment 
Find out the latest for this much-loved way of picking blue-chip dividend stocks.
Forbes  Oct 27  Comment 
Follow these 4th quarter dividend investing tips to potentially build upon your gains this year, and finish the year strongly!


Dividends are cash payments a company makes to its shareholders. In concept, it's similar to the interest paid on a savings account, or the yield on a bond. The main difference is that dividend payments are at the discretion of a company's management and board of directors. Dividends can be cut or raised at any time.

The basic dividend strategy

Investors following a dividend strategy are looking to maximize the amount of cash income generated by their portfolio - instead of trying to pick companies whose stock prices will rise. In essence, a sizable portfolio can throw off enough in cash dividends to replace the income from a job! These investors are looking for a few things:

  1. A healthy dividend yield, usually 3% or higher
  2. A company that has reliable cash flows so that the likelihood of a dividend cut is minimal.
  3. Companies with a history of regular dividend increases and no dividend cuts.

Usually, once this investment is found, the dividend investor will re-invest dividend payments into buying more shares of stock. By doing this, they receive increasing amounts of income due to two things:

  • More shares due to re-invested dividends
  • More dividends on each share due to dividend hikes.

An example: Sherwin-Williams Company (SHW)

To illustrate the viability of this plan, let's take a look at a stock paying a solid and sustainable dividend: Sherwin-Williams Company (SHW).

Let's say an investor purchased Sherwin-Williams back in 2000 when its dividend yield was about 2.75%. This company had a 20 year history of dividend hikes at the time, and this has continued to raise its dividend every year. By reinvesting those payments, the investor's yield steadily rose, and the effects of compounding accelerated until today Sherwin-Williams paid nearly 8% on the original investment in 2008.

Example of a good stock for applying the dividend strategy
Example of a good stock for applying the dividend strategy[1]

Assuming then investor continued this strategy, it is likely that this yield will continue to exponentially increase, so that by the time retirement rolls around (say, 20 years), the original investment could very well be paying us 50% of it's value, or more, annually, money that can go towards replacing working income.

Of course, there is one other matter. These dividend payers must also have cash flows that can sustain these payouts. One also needs to make sure that the company has a history of continually increasing dividends. By analyzing the cash flows and management histories of these dividend payers, one can find the stocks most likely to deliver continually rising income from an investment.

However, dividend strategies can be extremely attractive for very long term holders of stock.


  1. Using the Magic Formula with a Dividend Strategy
Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki