With the majority of long term investment posts on here being about holding in ETFâs 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 youâve built up a portfolio thatâs big enoughâŠ
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, Iâve 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).
In my own opinion I think it comes down to personal preference, Iâd 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. Itâs 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 âdiv aristocratsâ 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.
@CEY@dk1 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? Whatâs stopping me investing all my money a week before, then cashing out a week after they pay out?
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.
Thereâs nothing to stop you doing that, except that it doesnât 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. Donât even think of that â lots of people lost money as they thought they can outsmart the system.
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!
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.
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 wouldnât 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.
@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.
I agree. This should be a good discussion in the future
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 directionâŠ
I think diversification is key here. I would invest in tobacco companies for dividends, but I wouldnât go all in. People have been predicting the end of smoking and burning oil for decades but thereâs no sign of it slowing down yet
There is an ethics question as well with tobacco and oil, Maybe more so with tobacco as it doesnât really have a good side, at least Oil provides energy and transport. but I kind of think I canât change the world with my investment decisions, might as well try to make a few quid off them.
Guess you can take any company and find out that they have been doing something âbadâ ⊠Investing in Coca Cola for example ⊠do I contribute for rising obesity rates in the world ?
I donât think anyone directly answered this. I donât think there is any sound theory along those lines, no. Your long term portfolio only has to increase in value over time. In theory you donât need to care if this is done by the share price of stocks increasing (âgrowthâ), or by receiving dividends that you reinvest by purchasing additional shares.
But due to potential tax and dealing charge implications (⊠however largely negated by a freetrade ISAâŠ), on balance a wise investor would prefer growth stocks.
Youâd only switch out to high-div stocks if you needed income in retirement.
