Dividend Investing

Dividend investing is a hybrid strategy focused on generating income from your investments while also growing your wealth. Dividends are regular cash payments that a company sends to its investors. You can receive dividends as income, or you can instruct the company or your broker to reinvest your dividends in additional shares of stock.

Rarely has dividend investing been more essential.

The Federal Reserve has kept short-term interest rates—known as the “federal funds rate”—near zero since the recession in 2008. That means the usual avenues for income investors—U.S. Treasuries, CDs, money-market accounts—are essentially worthless. Thus, dividend stocks have become the primary alternative for earning a steady stream of income from your investments. 

That’s why more and more companies are jumping into the dividend pool. Roughly four-fifths of the companies in the S&P 500 now pay a dividend. Buying a stock that doesn’t pay a dividend can only reward you in one way: share price appreciation. Dividend investing, however, grows your wealth in three ways. 

First, like with any stock, your portfolio increases as the price of the stock appreciates. Second, you will receive an income stream of dividend payments, which you can collect in cash or reinvest to further boost your holdings. Lastly, many companies increase their dividends over time, providing an income stream that often outpaces inflation, and greatly increasing the yield the longer you hold the investment. (Your yield is how much you earn in income every year as a percentage of your investment.)

Dividend investing has traditionally been regarded as a “safe” way to invest. However, with 80% of the S&P 500 now paying a dividend, dividend investing can now be combined with practically any other investing style, from buy-and-hold blue chip investing to high-potential small cap investing (yes, some small caps pay dividends!).

Whether you choose to invest in dividend-and-growth stocks like Apple (AAPL) or investments that are all about the income (like REITs), what all dividend stocks do, particularly those that have been paying and growing their dividends for years (e.g. “Dividend Aristocrats”, companies that have increased their dividend payments annually for at least 25 years), is provide a buffer against huge losses. Investors treat a stock’s dividend yield like a floor, because it makes it easier—and more worthwhile—to hold these stocks through hard times.

Dividends are also proof of a company’s validity—there’s an old Wall Street saying that “dividends don’t lie.” That’s because dividends are cold hard cash paid to investors, so only companies that are actually raking in the money can sustain dividends over time. There’s no better indicator of a tried and true business than a long dividend history.

So dividend investing is a way to minimize your risk, and protect your portfolio against huge losses. It’s a way to fortify yourself against market volatility and the wild share-price fluctuations it brings. And as long as the traditional income avenues remain essentially closed off by the Fed, dividend investing will continue to be the most sensible way to build your wealth.

To help guide you in your dividend investing, we offer two dividend services at Cabot Investing Advice. Those are Cabot Dividend Investor, a service that has generated 328% total returns and a 14.1% yield back tested to 2009, and the Dividend Digest, a newsletter that presents the best of the best dividend-paying investments in a concise 12-page document. 

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Why Dividends are Important

History shows that dividend income is an important part of your total return when investing in common stocks.»

Stock Picks

Ross Stores

McKesson (MCK) distributes ethical and proprietary drugs, surgical supplies and health and beauty products throughout North America to the healthcare industry. The company also provides technical consulting services to biotech and pharmaceutical manufacturers.

Carnival Cruise Lines

Having just returned from vacation, Tim Lutts is thinking of the millions of baby-boomers who are spending more and more money on leisure travel, particularly on cruises, an industry that is dominated by a few big players.

China Biologic Products

Paul Goodwin advises putting this stock on your watch list.

Cabot Wealth Advisory

Do Your Stocks Have Borrowing Trouble?

By Nancy Zambell on July 28, 2015

Hostess is making news today as it is issuing $1.23 million in term loans—most of which will go toward paying $905 million in a special dividend to its private shareholders—which I may add, is also more than two times what the buyers paid for this tasty snack business, and triples the company’s debt. According to Bloomberg, these types of deals grew to nearly $16 billion in the second quarter, the highest level in the past 12 months. I’m not making a judgment for or against this action. I just want to make a point that this debt, or leverage recapitalization—spurred by low interest rates—is increasingly becoming a method in which private equity holders get their money back—without selling the business. But it does burden the company with additional debt, which isn’t going to fund company expansion or operations.Read More >

Sell Apple

By Timothy Lutts on July 27, 2015

Today, I’m writing on a MacBook Pro. This morning I did my morning crossword puzzle on my iPad. All day long, my iPhone is by my side. My home Wi-Fi comes from Apple AirPorts. And some nights, I stream entertainment through my Apple TV. In short, I love Apple products, and I expect to continue using them for many more years. But one of the most important market truisms is this: “The company is not the stock.”Read More >

Sunny Days

By Paul Goodwin on July 24, 2015

Every year, usually on a Thursday in July, most of the Cabot crew gathers in Salem, jumps into cars and heads north. With bathroom breaks and a stop to purchase refreshing beverages (ahem), the group drives through New Hampshire’s tiny seacoast neck and winds up in Kittery, Maine, at the Chauncey Creek Lobster Pound. There, lobsters, baked beans, coleslaw, steamers, mussels and (importantly) chips are consumed and the store of tissue-restoring beverages is significantly reduced.Read More >