The Basics Of Dividend Investing Rarely Change
As a lifelong dividend investor, I want to share my rules of dividend investing.
These rules have led to solid long-term investment returns. Not just for me but for many good dividend investors.
Please allow me to summarize them right away.
Rules Of Dividend Investing
Here are my top 10 dividend investing rules:
- Think long term
- Determine your objectives
- Adopt an investing strategy
- Choose dividend stocks wisely
- Invest regularly
- Diversify your dividend portfolio
- Limit the number of stocks
- Use consistent selling criteria
- Learn as much as you can
- Consider alternative investments
Next, I will discuss these points one at a time. Furthermore, I will sprinkle in a few thoughts from my experience. Also, there are many links to related articles for any knowledge gaps you seek to fill.
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
Rule 1: Think Long Term
First, refrain from dividend investing if you want to get rich quickly. Unless, of course, your idea about getting rich is earning annual investment returns of roughly 10%. With that return generated by a combination of dividends and capital gains.
Remember this: At any point, dividend stock values can decrease, sometimes by a lot.
I’ve been invested and stayed invested in dividend stocks during the following times of stock market turmoil:
- 20% drop on black Monday in 1987
- Bursting of the Dot-com bubble in 2000
- 2007-2008 financial crisis
- Pandemic-induced crash of 2020
So, having a long-term mindset is critical to stay invested through difficult times.
That’s when successful dividend investors make the most money. Precisely when there is panic and blood in the streets.
Finally, what is long-term? I suggest at least five years. However, in my case, it’s a lifetime.
Rule 2: Determine Your Objectives
Knowing why you desire to invest in good dividend stocks is essential to cultivate a long-term mindset. Thus, you must understand why you are investing.
Some possible objectives for investing in dividend stocks include the following:
- Long-term wealth accumulation
- Participating in the stock market
- Financial freedom at a young age
- Supplementing cash flow with dividends
- Using dividends for retirement planning
Rule 3: Adopt An Investing Strategy
Next, understanding your investment objectives makes selecting a dividend investment strategy easier since not all dividend investing strategies are created equally.
I classify dividend strategies into three different buckets as follows:
- High dividend income – low growth
- High growth – low dividend income
- Balanced growth and dividend income
Rule 4: Choose Dividend Stocks Wisely
Then, having a preferred strategy makes dividend stock selection much more straightforward. First, of course, you must understand vital dividend metrics.
Fortunately, I have written several informative guides on essential metrics for identifying high-quality dividend stocks. For example:
First, I like dividend yields in the 2% to 5% range. Furthermore, I avoid high dividend yield stocks.
More reading: Understanding good dividend yields vs. bad ones
Dividend Growth Rate
Instead of high dividend yields, I prefer high per-year dividend growth rates. Generally, I seek stocks with a history of 5% to 8% yearly dividend increases.
More reading: How and why dividends increase over time
Dividend Payout Ratio
To ensure an adequate level of dividend safety, I focus on the dividend payout ratio. First, however, you must know what you are looking for here.
More reading: Good dividend payout ratios vs. risky ones
As a general dividend investing rule, I shy away from certain types of stocks. So, for example, I hold few, if any:
- Real estate investment trusts
- Master limited partnerships
- Business development companies
- Monthly dividend stocks
Instead, I stick with dividend growth stocks with solid long-term dividend track records. Specifically, I like the Dividend Aristocrats and Kings.
More reading: Why invest in Kings and Aristocrats
Finally, I avoid stocks that are grossly overvalued. However, I do not obsess about stock valuation because high-quality dividend stocks rarely sell for bargain prices.
More reading: Best times to buy dividend stocks
Rule 5: Invest Regularly
From dividend investing rule #1, we know that having a long-term investment horizon is vital. However, short-term thinking comes into play too.
Specifically, invest money regularly. To do so, I believe in dollar-cost averaging into dividend stocks.
Thus, I allocate money monthly for dividend stock investments since one of my dividend investing goals is to invest money every month.
Okay, we are halfway done. So, let’s keep moving. And be sure to save this Pinterest pin so you can return to this post later.
Rule 6: Diversify Your Dividend Portfolio
I often get this question: what is the optimal number of dividend stocks to own?
And my answer is: Hold enough dividend stocks to provide adequate investment diversification. But, not more dividend stocks than you can effectively monitor.
Thus, the correct number will be different for each investor. However, a good rule of thumb is to hold between 20 and 30 high-quality dividend stocks.
Good dividend-paying mutual funds and ETFs are also an option to achieve adequate diversification.
Rule 7: Limit The Number Of Stocks Owned
One of the mistakes I made as a young dividend investor was holding too many stocks. As a result, I ended up having more companies than I could effectively monitor. Furthermore, many positions needed to be more significant to matter.
Now I own a set number of dividend stocks that I will not exceed. So, when a shiny new dividend stock opportunity comes along, I will only invest if I identify a stock to sell and eliminate from my portfolio.
I suggest you do the same. It instills good investment discipline, forcing you to replace what you believe is an underperforming dividend stock in your portfolio with a new one.
Rule 8: Use Consistent Selling Criteria
So, how do you decide what to sell? If you follow the dividend investing rules we have discussed thus far, the sell decision is easy.
First, identify any stocks that no longer fit your dividend investment strategy.
Second, go back to rule #4, where I discussed choosing dividend stocks wisely. Based on the current dividend metrics, ask yourself what stocks you hold that no longer fit your initial investment criteria.
As a result, sell decisions are more manageable when you have an investment strategy and defined stock selection criteria.
Okay. That completes the first 8 rules of dividend investing. However, I have two more before I wrap this up.
Rule 9: Learn As Much As You Can
The more you know about dividend investing, the better dividend stock investor you will become. Thus, learn as much as you can.
Be smart. Know what you are doing and understand where you are putting your money. For this purpose, I included links to many of my supporting articles in the text above.
However, it’s wise to learn from multiple sources. Furthermore, everyone absorbs knowledge in different ways.
So, for another excellent resource on dividend investing, I recommend
The content is perfect for building your passive income stream from dividend payments.
Rule 10: Consider Alternative Investments
Last but not least, putting all your eggs in one basket is rarely a good idea. So, consider other asset classes to balance out the ups and downs you will experience with your dividend stock portfolio.
Depending on your age and financial situation, having some cash reserves and bonds as part of your asset mix is a good practice.
Alternative investments, such as real estate and precious metals, can be a good idea too. For example, I’ve been looking at farmland for hedging against inflation as part of my overall financial planning.
If you, like me, are looking for alternative investments, check out the farmland investment opportunities at AcreTrader.
Okay. That’s a wrap. Not 8 rules of dividend investing or 9; it’s a complete set of 10 dividend stock rules of investing in which I firmly believe.
So, allow me to wrap up with a few parting thoughts.
Rules Of Dividend Investing
Good dividend investors exercise discipline. They understand the basics of dividend investing and consistently apply the principles discussed today.
So, consider today’s stock dividend rules of investing to achieve your financial goals.
Next, are you hungry for more knowledge? If so, check out our:
Finally, best of luck with your investments! And before you go, save this to your favorite Pinterest board:
Author Bio, Disclosure, & Disclaimer: Please join me (Tom) as I try to achieve my goals, find my next place to live, and make the most of my money. However, I am not a licensed investment adviser, financial counselor, real estate agent, or tax professional. Instead, I’m a 50-something-year-old, early retired CPA, finance professional, and business school teacher with 40+ years of DIY dividend investing experience. I’m here only to share my thoughts about essential topics for success. As a result, nothing published on this site should be considered individual investment, financial, tax, or real estate advice. This site’s only purpose is general information & entertainment. Thus, neither I nor Dividends Diversify can be held liable for losses suffered by any party because of the information published on this website. Finally, all written content is the property of Dividends Diversify LLC. Unauthorized publication elsewhere is strictly prohibited.