If you are the kind of guy who would wish to collect checks for the rest of your life, then investing in dividend-paying stocks is the way to go. Whenever a publicly-traded company earns a profit, management always has three choices on how to use the profits:
- Reinvest in the company
- Carry out buybacks
- Offer dividend to investors
A dividend is simply the distribution of a company’s earnings to shareholders. The board of directors determines the payout. The best dividend-paying stocks are those that pay out regularly and without failure. Likewise, they tend to increase the dividend payout ratio from time to time.
Things to Consider When Choosing the Top Dividend-paying Stocks
- Long term prospects
- Management and Dividend History
Top dividend stocks are mostly of companies in a phase of robust growth. Such companies are market leaders in their respective industries and post earnings growth quarter over quarter. Any dividend-focused investor should focus on companies with the ability to thrive in harsh economic conditions.
You want to invest in dividend stocks with solid financials. Likewise, companies should have the best credit rating. Similarly, a company should have reduced debt levels as creditors get paid fast than shareholders.
Top dividend stocks are of companies being run by managers with a reputation of being investor-friendly. Likewise, such companies are market leaders in their respective industries, whereby they operate under minimal competition.
Dividend Investing Mistakes to Avoid
While dividend stocks provide an opportunity to generate passive income on the side, there are some mistakes to avoid
- Buying a dividend stock purely on recommendation
- Focusing solely on dividend yield and not long term prospects
- Focusing on current rather than long term dividends
- Buying a dividends stock just because it is cheap
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