The essence of the dividend strategy is that your capital makes money here and now. You do not earn on the growth of the share price, but on regular receipts of money to your account.
That is, you are buying health, sound sleep and a clear financial future.
This strategy does not suit me personally. It has less flexibility than the profitable one. But there are people for whom it will suit perfectly.
For example, I would recommend the dividend strategy to my mom. Where do dividends come from ?!
A share is a share in a business. If the business is successful, then it is profitable. This profit is distributed proportionally among the shareholders.
Dividend strategy is suitable for mature, seniors and not only
I am a bit categorical. I admit that there are younger people for whom this strategy will be closest.
Let's take an example. We have a pensioner. He is 65 years old. He has some capital. Sources of capital can be:
- Personal business. Successfully sold. Or not requiring personal involvement.
- Highly paid employment. He has been putting the surplus in a "jar" over the years.
- Inheritance from the USSR in the form of real estate. Example: I sold a three-ruble note in the center and moved to a “odnushka” on the outskirts.
- Selling unnecessary "trash". Car, cottage, etc.
Note. The planning horizon of such a person is unclear. Maybe he will live 25 years, maybe a year.
Basic principles of the dividend strategy
- Money is today. Alive. Not virtual.
- Money – monthly. You need to eat for something.
- A clear plan of income. We always know the size and date of future cash flow.
- We keep most of the capital in the currency of consumption. But something is also in hard currency.
- We stop playing any gambles: IPOs, cryptocurrencies, trading, robots, promising niches.
- We are not playing at the growth of the portfolio body. We do not expect crises and deep corrections.
- The “safety cushion” (deposits, short bonds) is much larger than that of young investors.
- Surplus for reinvestment should remain. We do not eat up the body of capital. Remember compound interest.
- If possible, we provide additional income to fund the account. For example, teaching or working from home.
- Remember taxes at 13%. You cannot avoid them.
What amount of capital should be. And how much can you earn?
How much money do you need to be able to live on the incoming dividends?
Let's say you are a lonely person. You live in a large city. During the active period, 45,000 rubles a month was enough for you to live on.
You don't want to lower your current consumption.
You also need funds to invest. Let's say another 15,000 rubles a month.
With the dividend strategy, you manage to get the ninth return (9%). This is an achievable bar for the Russian market.
60.000 x 12 = 720,000 rubles
That is how much money you need in dividends per year
This is exactly how much it takes to retire
Not so much is needed for happiness. 🙂
You can play with numbers. For example, reduce consumption. Or reduce a little the amount of funds that you send for reinvestment.
Similarity to a profitable strategy
The dividend and profitable strategy are twin brothers. But there are nuances:
- Dividend investors are chasing big returns (double-digit, for example). Profitable investors can sit comfortably with lower dividends. But to know that in the future the issuer is able to increase profits and increase dividend payments.
- Dividend investors usually only sit in paper assets. Profitable instruments have a wider range of instruments.
- Dividend investors almost never wear the mask of a value investor. Profitable people can afford it. After all, profitability can be not only from dividends, but also from the growth of the body.
- The dividend investor hardly looks at the growth of the body of capital.
The desire of the majority shareholder to pay dividends is the main commandment of the dividend investor
You must clearly understand that you will not be dumped and you will be paid.
Reasons why they usually get paid on time and on a regular basis:
- Need a cache. The majority shareholder (the decision-maker with a large stake) plugs holes in other businesses.
- The company is milked by the state. The requirement to replenish the state budget.
- The parent company is milking the "daughter".
- Change of ownership. The desire of the majority owner to pay off debts through dividend payments
- Purchase of shares by management.
- Nowhere to put money. Sharp growth in net profit.
How to understand the intentions of the majority shareholder? Attend shareholder meetings, ask questions and monitor the news flow for your issuer.
What points and indicators does the dividend investor pay attention to?
- The company has a clear dividend policy prescribed in the Articles of Association.
- Payment history.
- Amount of dividends.
- Growth rates of dividends.
- Current profit.
- Retained net income.
- Growing dynamics of the company's performance.
Where to watch the reporting? In company reports, for example, here https://www.e-disclosure.ru/
Or in aggregators.
Risks of the dividend strategy
High dividends can hide high risks. You should always have a clear answer to the question … why, in fact, they pay so much. If a company is in trouble, it may be pursuing an unreasonable dividend policy.
Very high dividends limit business growth
This means that the company cannot spend money on development. She has to withdraw funds to shareholders.
Pay close attention to the Payout Ratio. This is the percentage of profits that the company pays out to shareholders in the form of dividends. For example, if the Payout ratio is more than 75-90%, then this is a reason to think.
You may be thrown
Dividend yield is not guaranteed. The company can cancel or reduce dividends. This risk is more typical of the Russian market. We do not yet have a stable dividend tradition. There are two ways to minimize this risk:
- Diversification. Your portfolio should contain more than 15 div. Papers. Then, one of the issuers' scam will not hit the overall payments hard.
- Adding US dividend securities to the portfolio. More on this below.
Dividend investor makes XY on dividends
It makes sense, right? 🙂
Opportunities constantly arise in the market. For example, relatively recently there was a bond crisis on the Russian market. It was possible to buy OFZs with double-digit yield. The window of opportunity quickly slammed shut. But investors had time to shop.
Dividend investors do not catch the bottom, they use the "cushion" of deposits and bonds when they are completely satisfied with the current dividend yield. 10% – good … Is there a crisis? Seeing 20-30% dividend yield? Generally chocolate. We buy.
Dividend investor is not afraid of illiquid assets
CAUTION! Do not repeat for beginners!
Do you know that once in a while there are stories on the OTC market when you can buy a security with a yield of 40% (!!!) in dividends and higher.
The cons are clear. Not the fact that you can quickly sell such paper back. But why sell the treasure? If we know the whole situation within the company, read the financial statements, went to a shareholders' meeting and see no problems, then why not buy.
Such securities are bought through a voice request. You need to call the broker and ask to make a deal with the required issuer.
Start studying the OTC market ONLY AFTER you master all the details of the dividend strategy.
The dividend investor knows how to receive a “salary” once a month and even more often
For some reason, many are afraid of the seasonality of dividend payments. You can already NOW make sure that the dividend and coupon income drips to your card not once every six months or a year, but MONTHLY.
What if? Myths of opponents of the dividend strategy
What if a crisis. The stock will fall 70-80%. And dividends too.
Dividends during crises do not fall by 70-80%. Because it does not happen that at once the profits of all companies in the portfolio collapse at times. Especially if the portfolio is diversified by country. The exception is world war. But at this moment you will no longer have time to invest.
During a crisis, many companies, on the contrary, leave dividends at the same level and even raise them. The reasons are different. Someone needs a cache to plug holes in other businesses. Someone is afraid of the fear of investors and an even greater fall in share prices.
By the way, it will be for dividend investors that it will be easiest to transfer the scenario ala Japan to the 90s (sharp drop + long "sideways"). Dividends will feed.
Dividend stocks will fall like the rest
This is true. BUT! Dividend stocks fall the least during crises. You can verify this by opening the charts from the list of US dividend aristocrats.
Dividend investor's safety cushion may disappear
A profitable investor keeps a "safety cushion" only in deposits and ultra-short bonds.
In the case of deposits, he carefully scatters them among the banks. To qualify for the DIA.
In the case of short bonds, he does not sell them in a panic, but calmly waits for redemption at par and buys up shares that have fallen in price. Please note that even during severe crises, ultra-short bonds fell in price by 10-15%. This is nothing against the background of the shares that have developed 10 times.
What about dividend trading?
Dividend trading has nothing to do with dividend investing strategies. This is the lot of speculators.
Examples of securities
Look here https://smart-lab.ru/q/shares_fundamental/?field=div_yield
Or here https://blackterminal.ru/dividends
USA, dividend aristocrats
They are included in the S&P 500 index. They pay 25+ years. Liquid. High capitalization.
Keep the entire list of papers:
- 3M Company
- A. O. Smith Corporation
- Abbott Laboratories
- AbbVie, Inc.
- ABM Industries Incorporated
- Aflac Incorporated
- Air Products and Chemicals, Inc.
- Albemarle Corporation
- Amcor PLC
- American States Water Company
- Aptargroup, Inc.
- Aqua America, Inc.
- Archer-Daniels-Midland Company
- AT&T Inc.
- Atmos Energy Corporation
- Automatic Data Processing, Inc.
- Bank OZK
- Becton, Dickinson and Company
- Black Hills Corporation
- Brady Corporation Class A
- Brown & Brown, Inc.
- Brown-Forman Corporation Class B
- C.H. Robinson Worldwide, Inc.
- California Water Service Group
- Cardinal Health, Inc.
- Carlisle Companies Incorporated
- Caterpillar Inc.
- CDK Global Inc
- Chevron Corporation
- Chubb Limited
- Church & Dwight Co., Inc.
- Cincinnati Financial Corporation
- Cintas Corporation
- Clorox Company
- Coca-Cola Company
- Colgate-Palmolive Company
- Commerce Bancshares, Inc.
- Community Bank System, Inc.
- Consolidated Edison, Inc.
- Cullen / Frost Bankers, Inc.
- Donaldson Company, Inc.
- Dover Corporation
- Eaton Vance Corp.
- Ecolab Inc.
- Emerson Electric Co.
- Essex Property Trust, Inc.
- Expeditors International of Washington, Inc.
- Exxon Mobil Corporation
- Fastenal Company
- Federal Realty Investment Trust
- Franklin Resources, Inc.
- General Dynamics Corporation
- Genuine Parts Company
- H.B. Fuller Company
- Hormel Foods Corporation
- Illinois Tool Works Inc.
- International Business Machines Corporation
- J.M. Smucker company
- John Wiley & Sons, Inc. Class A
- Johnson & Johnson
- Kimberly-Clark Corporation
- Kontoor Brands, Inc.
- Lancaster Colony Corporation
- Leggett & Platt, Incorporated
- Lincoln Electric Holdings, Inc.
- Linde plc
- Lowe's Companies, Inc.
- McCormick & Company, Incorporated
- McDonald's Corporation
- MDU Resources Group Inc
- Medtronic Plc
- Meredith Corporation
- MSA Safety, Inc.
- National Fuel Gas Company
- National Retail Properties, Inc.
- New Jersey Resources Corporation
- NextEra Energy, Inc.
- Nordson Corporation
- Nucor Corporation
- nVent Electric plc
- Old Republic International Corporation
- Pentair plc
- People's United Financial, Inc.
- PepsiCo, Inc.
- Polaris Inc.
- PPG Industries, Inc.
- Procter & Gamble Company
- Realty Income Corporation
- RenaissanceRe Holdings Ltd.
- RLI Corp.
- Roper Technologies, Inc.
- Ross Stores, Inc.
- RPM International Inc.
- S&P Global, Inc.
- SEI Investments Company
- Sherwin-Williams Company
- Sonoco Products Company
- Stanley Black & Decker, Inc.
- State Street Institutional Liquid Reserves Fund
- Sysco Corporation
- T. Rowe Price Group
- Tanger Factory Outlet Centers, Inc.
- Target Corporation
- Telephone and Data Systems, Inc.
- TJX Companies Inc
- UGI Corporation
- United Bankshares, Inc.
- United Technologies Corporation
- V.F. Corporation
- W.W. Grainger, Inc.
- Walgreens Boots Alliance Inc
- Walmart Inc.
- West Pharmaceutical Services, Inc.
US dividend and bond ETFs
You can copy a dividend strategy with literally two or three issuers. There is plenty to choose from:
- SDY – SPDR S&P Dividend ETF – Payouts Quarterly – S&P 500 Aristocratic Index
- NOBL – ProShares S&P 500 Dividend Aristocrats – Payouts Quarterly – S&P 500 Aristocrats Index
- HDV – iShares Core High Dividend ETF – Payout Quarterly – High dividend payout US stocks
- VIG – Vanguard Dividend Appreciation ETF – paid quarterly – US stocks that have been increasing their annual dividend payments for 10 years or more
- PFF – iShares US Preferred Stock (PFF) – Payouts monthly – preferred shares of US companies
- SHYG – iShares 0-5 Year High Yield Corporate Bond ETF – Payout Monthly – Short High Yield US Bonds
- SHY – iShares 1-3 Year Treasury Bond ETF – Payout Monthly – US Short Government Bond