Dividend paying stocks - new(ish) investor question

(#1,490) #1

With the majority of long term investment posts on here being about holding in ETF’s for many years (which I agree with), I see quite a few posts about dividend paying stocks, and using them to enhance your income when you’ve built up a portfolio that’s big enough…

So the question is, should I in theory be diversifying my portfolio to include some high dividend paying stocks? Say I invest in a high dividend paying company, do I have to hope their dividend % is higher than the amount their stock may reduce by in any given year for it to be worthwhile?

My long term goal is a healthy retirement pot, I’ve been quite lucky so far in that every single one of my shares is healthily in the green (I know this will go up and down).

Introduce yourself :wave:

In my own opinion I think it comes down to personal preference, I’d just like to point out that there are many reasons a company may be paying a high dividend, and how that relates to stock price. It could be, say, a special payout on record earnings or increasing yield because of a decline in the price. It’s helpful to look at other metrics (M&S seems very attractive at the moment for example, but that yield is not really sustainable, its just down to the price decrease. There is a rights issue later this year as well which will put more pressure on the price).


I think just looking at the div % is not a smart move (especially if its for the long term). Companies that pay out high div usually need a lot of cash flow and a decent balance sheet if you decide to invest in them. We have many examples of high div paying stocks which struggle after a while and reduce their div % or even stop them completely. You would be left with the shares that struggle to keep their value even.

Maybe have a look at ‘div aristocrats’ rather than focusing on high yield div payers. A decent company with a 2% div might make you more money in the long run compared to another company that offers you currently 6 or even 8%.

But please do your own research I am not a specialist here or anything I just share with you what I am doing. A good exercise would be to go back a couple of years and have a look at those high div paying companies and see how they are doing now.

Hope this helps.


very good points @dkeighobadi

(#1,490) #5

@CEY @dkeighobadi thanks for the replies both, appreciated!

Another question - If I was to invest in a dividend paying company, do I have to own the stock for a certain amount of time before they pay? What’s stopping me investing all my money a week before, then cashing out a week after they pay out?

(Dave Smith) #6

You only need to own the stock on the ex dividend date, in practise this means you need to buy it before close of play the day before the ex-dividend date.

There’s nothing to stop you doing that, except that it doesn’t usually work. The stock tends to rise just before ex-dividend date and drop back by approximately the value of the dividend straight after

The best way to make money with dividend stock is to reinvest the dividends so you get compound returns over the long term


This is why its not a good idea to buy the stock right before and sell it after the div gets paid out. Don’t even think of that – lots of people lost money as they thought they can outsmart the system.

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(Dave Smith) #8

Exactly, In an efficient market with good liquidity any trick you can think of will get evened out by traders and algorithms who can buy and sell faster than you!

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Just focus on good strong companies that have been paying out div constantly over long period of time and also have increased their div step by step over the years. Have a look at their balance sheet and their cash flow (get yourself familiar with these two elements and you are already smarter than 99% other investors). Including your personal margin of safety (how much risk do you want to take) you can make a very good decision in investing in div stocks for the long term.

(Chris) #10

My two pennies here would be to work your way slowly into this until you see how it works & what the short, medium & long term impacts of dividend investing are. As a few people have pointed out, there are a few common ways people get caught when hunting for dividends - most common are not understanding how, when & what is paid, the other is people hunting for dividend yield. I’d be wary of anybody who buys a company based on its % return unless it has a tremendous (10+ years) of paying that dividend. The so called ‘dividend’ or ‘value’ trap is an extremely expensive mistake & one that is not quickly corrected.

If this is something that interests you then I would take 1 of two approaches:

  1. Continue with your ETF strategy & ‘keep an eye on’ dividend stocks. By that I mean use Yahoo Finance or something similar to have a paper portfolio of the companies you like from a dividend perspective. Trust me when I say, you won’t miss out on anything here, in all likelihood you’ll learn a lot and you can start putting money into dividend stocks in a year or two once you understand the markets a little better (Apologies if I sound pedantic here, I don’t mean to be).
  2. If option 1 seems too passive and unadventurous for you then I suggest you simply limit the % of your portfolio you have in dividend stocks (say around 10-15%) and strictly enforce this limit for several years (eg 3-5 years). This timeframe will remove dividend anomalies and a large % of value traps and you’ll have a solid base that you can then move your ETF money into. That being said, no dividend stock is really truly tested until it gets hit with a recession.

Just in case this helps, the above input is based on 14 years of dividend investing. The mistake many people make with dividend investing is thinking too short term, you’ll see people say such things as:

  • This stock pays quarterly so I like it more than this stock that pays semi-annual
  • The yield on this stock can’t be ignored
  • The stock and dividend are both growing I’m winning both ways
  • Its a huge business so its dividend isn’t likely to drop

The trouble with all of these statements is that they very rarely stay true over a 5 year period. Dividend investors seeking extra income get hit extremely hard when a company takes a turn for the worst. We’ve been in a 10 year bull market and many companies have extremely comfortable dividend positions right now, if a true global recession hits you’ll see these positions disintegrate quickly simply because of the sheer amount of debt that most listed companies are carrying at the moment - trust me, I’ve been burned by this before.

(Dave Smith) #11

There are some companies with very long histories of paying good dividends

For example Shell have not cut their dividend since WWII, so even though their dividend is around 6% I wouldn’t be too concerned

If a company operates in a mature market and there is not the opportunity for huge growth from reinvestment, but they still make lots of cash. Dividends are a good way of sharing profits with shareholders.

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@Dave let me play devils advocate: Yes Shell ticks a lot of boxes for a good div paying stock but how do you think about investing in a company that is focused on a depleting commodity? So there are more questions you need to answer before investing in a company. I personally feel uncomfortable investing in a company that relies on a commodity.

(Dave Smith) #13

Oil is going away anytime soon. I think there are probably decades of dividends to be had before that becomes a problem.

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I agree. This should be a good discussion in the future :slight_smile:
I just wanted to point out that there is often more to look out for (especially based on personal preferences). Would you invest in a tobacco company even though they pay you lots of DIV ? But I see this is going into a different direction…

(Dave Smith) #15

I think diversification is key here. I would invest in tobacco companies for dividends, but I wouldn’t go all in. People have been predicting the end of smoking and burning oil for decades but there’s no sign of it slowing down yet

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Again true ! I was hoping to make a bit of a change and invested in Tesla and we all know where this is going right now hahaha.

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(Dave Smith) #17

There is an ethics question as well with tobacco and oil, Maybe more so with tobacco as it doesn’t really have a good side, at least Oil provides energy and transport. but I kind of think I can’t change the world with my investment decisions, might as well try to make a few quid off them.

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Guess you can take any company and find out that they have been doing something ‘bad’ … Investing in Coca Cola for example … do I contribute for rising obesity rates in the world ?

(Alex Sherwood) #19

There’s been some good discussion about that in the ethical investing topic too -

maybe that’s food for thought? :slight_smile:


Some ETFs pay a decent dividend, eg IShares UK Dividend Plus (IUKD) pays a current yield of 6.51%

I’m sure there are others that you can research also which are available with Freetrade, so you get some diversification and dividend income.

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