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. 

Analysts Center

Our analysts regularly share content from their premium advisories. See a sampling of our analysts’ unique takes on current market conditions and how they impact a wide range of investments.


Why Dividends are Important

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

Stock Picks

Tesla Motors

If you’re not on board the stock, there’s no rush. Wait for a better entry point in a more constructive market.

Church

Church & Dwight owns the Arm & Hammer, OxiClean and Trojan brands, as well as some smaller, faster-growing brands. But even after a 35% climb in 18 months, Church & Dwight still looks strong and poised for further gains.

Restoration Hardware

Restoration Hardware (RH) has been on my watch list for a long time. Believe it or not, I’ve been watching the stock for about a year—it was my Top Pick at the 2014 Cabot Investors Conference, nearly one year ago—and now, after a ton of starts and stops, shares look poised to get going.

Cabot Wealth Advisory

Apple vs. Tesla

By Timothy Lutts on September 01, 2015

Back on July 27, in a column titled “Sell Apple,” I told you that Apple, the world’s most loved and most highly valued company, was likely past its point of peak perception. I suggested that even though the company would continue to grow, its stock would suffer as investors slowly sold and went searching for the next Apple. (Precedents include both IBM and Microsoft.) Since that day, of course, the broad market has fallen apart, and it’s enlightening to see how certain stocks have behaved since then.Read More >

Market Shocks (and Aftershocks)

By Paul Goodwin on August 28, 2015

In the stock market, September is usually a time of increased purpose, as the giants of Wall Street return from their summer vacations (after Labor Day), tanned, re-energized and ready to grapple with the market and its challenges.Read More >

My First Market Crash

By Timothy Lutts on August 27, 2015

Everyone remembers their first market crash. Mine was October 19, 1987, when the Dow fell 508 points (22.6%) in one day. This, of course, was before we all had computers on our desks (and in our pockets) to keep us up to date on what was happening. All we had were telephones—and unanswered questions about how some poorly understood computer-trading programs had allowed this to happen.Read More >