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3 Dividend Investing Tips That Could Earn You Thousands

By Reuben Gregg Brewer - May 15, 2018 at 6:46AM

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Dividend investing requires more than finding a stock with a high yield. Here are three tips that can help you make more money.

Like any style of investing, dividend investing isn't a hard science. Indeed, there's something of an art to finding the dividend stocks that are right for your personality and portfolio. But there are some rules you can follow that will help formalize the process and make it a bit more rigorous. Here are three key dividend tips that could help you earn some extra money.

1. Look for a history of increases

There are a lot of companies that pay dividends. Too many, in fact, for most investors to parse through them all. So a good first cut is to stick to companies that have a history of rewarding investors with regular annual dividend increases. There are a number of different lists available to investors here, including the Dividend Aristocrats (25-plus years of annual hikes and some liquidity requirements) and Dividend Achievers (10-plus years of annual dividend hikes). And there are the lists of Dividend Champions (25-plus years), Contenders (10 to 24 years), and Challengers (5 to 9 years) maintained at The DRIP Investing Resource Center.

The word yield spelled out with dice sitting atop piles of coins

There's more to dividend investing than finding a big yield. Image source: Getty Images

By using lists like these, you focus on companies that have proved themselves over time, with longer histories through multiple business cycles. More important, however, you quickly shorten the list of dividend paying stocks that you have to look at.

The length of the dividend history you choose to look at is up to you, but recognize that the more stringent the requirement, the shorter the list of stocks from which you'll have to choose. For example, the Dividend Champions list includes just 120 names, the Dividend Contenders list has 217, and the Challengers 545. That said, being more stringent often leads to some pretty iconic names, including Procter & GambleCoca-Cola, and Consolidated Edison, to name a few. The other end of the spectrum, Challengers, includes a far broader collection, but, as the numbers show, many will fail to progress into the higher ranks. 

2. Keep up with inflation

A long history of dividend increases is great, but you also need to consider the size of the dividend increases you get. This is because inflation slowly eats away at the buying power of your income over time. But if your dividends grow at the roughly 3% historical rate of inflation growth or more, then your buying power will keep up with inflation or, better yet, expand over time.

For an example of just how important this is, take a look at the graph below. Midstream companies ONEOK Inc. (OKE -0.71%), Magellan Midstream Partners LP (MMP -0.40%), and Enterprise Products Partners L.P. (EPD -0.88%) have each increased their disbursements for more than a decade. However, there is a difference in the growth rates over time. Enterprise's 10-year annualized distribution increase was 5.7%, Magellan's was 10.9%, and ONEOK's dividend rose at an annualized 16.1% clip. Just a few percentage points here makes a huge difference in the growth of the disbursement over time, as the chart below clearly shows.

EPD Dividend Per Share (Quarterly) Chart

EPD Dividend Per Share (Quarterly) data by YCharts.

The point here isn't to get you to focus on only the highest growing dividends. Indeed, you'll want to have a mix of companies so you create a diversified portfolio. That, in turn, will likely lead to a variety of different growth rates. But you should try to limit yourself to companies that have dividend growth rates that have historically beaten inflation. And if you are stuck between two roughly similar options, you might want to go with the company that has the higher dividend growth rate.

3. Look for high (relative) yield

The next issue to contend with is the size of the dividend yield. It would be wonderful if buying a high yield was all that was needed to create a great dividend stock portfolio, but unusually high yields can lead you to risky stocks. For example, many Dividend Challengers have double-digit yields right before they fall off the lists completely because of a dividend cut. Which is why you'll want to look instead at relative yield -- specifically, relative to a company's own history.

A great example today is Hormel Foods Corporation (HRL -0.75%). It has a yield of around 2.1%, just a little higher than what you'd get from an S&P 500 Index fund. That doesn't sound very exciting at all. But that yield is at the high end of the company's historical yield range. This suggests that it is priced relatively cheaply today compared to its past. That said, it has increased its dividend for 52 consecutive years with a trailing 10-year annualized increase rate of 16.3%. That's a compelling combination of facts. And, the best part: The dividend isn't so high that it appears to be at risk.

HRL Dividend Yield (TTM) Chart

HRL Dividend Yield (TTM) data by YCharts

Essentially, by looking at yield relative to a company's own history, you are using yield as a rough valuation tool. Combined with the other factors above, that will help you stick to reliable dividend payers that are toward the value side of the spectrum. Clearly you'll want to do more digging to ensure that there's nothing materially wrong with the company you are researching (which could lead to a dividend cut). In Hormel's case, the headwind pushing the shares lower is a shift in investor buying habits, an issue which the financially strong food company is working on addressing.

Put this trio to work

So there you have three important dividend investing tips that can help you earn thousands. Although each one in isolation is pretty valuable, when you put them together, their power really starts to shine. And it isn't all that hard to do. First, cull out companies with long histories of annual dividend increases (10-plus years is a good middle ground), then focus on those with the highest dividend growth rates and largest yields relative to their own history. A few deep dives on the resulting short list, and you'll have a solid portfolio in no time.

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Stocks Mentioned

Hormel Foods Corporation Stock Quote
Hormel Foods Corporation
$47.60 (-0.75%) $0.36
Enterprise Products Partners L.P. Stock Quote
Enterprise Products Partners L.P.
$24.34 (-0.88%) $0.21
Magellan Midstream Partners, L.P. Stock Quote
Magellan Midstream Partners, L.P.
$47.96 (-0.40%) $0.19
ONEOK, Inc. Stock Quote
$55.73 (-0.71%) $0.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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