Buying Dividend-Earning Stocks for Income and Portfolio Safety

Adding dividend-earning stocks to your portfolio will add a level of security, especially if they are from companies with a history of growth


dividend earning stocks

Dividend-earning stocks are a primary focus for many income investors. They are also major targets of investors trying to build a level of stability within their portfolios. These stocks can provide income and peace of mind for investors who are particularly worried about risk.

However, it’s important to realize that not all dividend-earning stocks are the same. Like dividend growth stocks, some dividend stocks have more volatility associated with them than other more conservative dividend-paying stocks like some top blue chips. It’s imperative to understand the traits of the best dividend stocks worth investing in.

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Recognize the characteristics of dividend-earning stocks to add to your portfolio

Conservative investors looking for dividend-earning stocks should put their focus on investments that meet the following criteria.

For starters, look for companies with a history of dividend payments. Companies that have made dividend payments for at least five years are a good starting point. You will also want to search for dividend-paying stocks that dominate the market they reside in.

Next, consider any type of hidden assets that the company might have. These assets will increase in value once they become realized. You can find hidden assets in the real estate a company owns, brand recognition, and research and development.

Dividend-earning stocks for growth 

Investors that want the potential of significant gains will often look to dividend growth stocks. These investors must also be comfortable with heightened levels of volatility and risk.

Dividend growth stocks may have a wide variety of characteristics. Does the company have manageable amounts of debt? If so, it could be a worthwhile investment. Be cautious if the company is debt heavy, which would likely lead to significant losses if there was a market downturn. Companies with excessive debt are usually impacted first when the economy slumps.

Know these important dates to receive your dividends

There are four important dates to remember if you want to receive any dividends. The first date is the declaration date, when the directors of the company specify that a dividend payment will be made to shareholders. On the declaration date, the company determines the amount of the dividend payment in addition to when the dividend will be paid.

The date when the actual dividend is paid out is known as the payable date. For an investor to receive the dividend payment, they must be holding the stock on the payable date. The record date is established before the payable date.

The ex-dividend date is two business days before the record date. Shares of the dividend-earning stocks will pay a dividend to those holding the stock before the ex-dividend date. An investor would still receive the dividend if they were to buy the stock one day before the ex-dividend date. However, if the stock is purchased on the ex-dividend date or anytime after it, the shareholder will not receive the dividend.

Understanding dividend-earning stocks by payout ratio

One final consideration to make when looking for dividend-earning stocks to buy is the payout ratio associated with the stock. Knowing the dividend payout ratio can help you get an idea of whether or not a company will continue paying a dividend, and may even provide some insight on the dividend’s growth or lack thereof.

If a company maintains a consistent payout ratio, then the dividend should also remain steady. If the company maintains a consistent payout ratio while also increasing its earnings, then it is likely that the dividend payment will increase as well.

However, suppose the company ends up paying out higher rates of its earnings to maintain its regular dividend payment, or the dividend decreases. In that case, you may want to look deeper into the holding. A dividend cut can be a signal that the company is having cash flow problems. It may also mean that the company is experiencing a seasonal or business cycle decline.

It’s essential to understand what is at play before deciding if you want to continue holding the stock, or if it is best to sell it before it drops even more.

How significant is dividend investing in your overall portfolio mix?

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Stock investing is not an exact science, and common mistakes can cost you a lot of money. Avoid these pitfalls—revealed in this FREE report, Five Mistakes to Avoid When Stock Investing.

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