Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

3 Dividend Investing Tips That Could Earn You Thousands

By Rick Munarriz - Oct 27, 2020 at 10:05AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

High yields look great on paper, but the real money to be made in dividend stocks is in high growth prospects.

Money market funds and CDs aren't cutting it with income investors these days. With interest rates so low it's only natural for risk-averse investors to find themselves in the stock market for all the wrong reasons. 

Let's go over a few pointers to help yield chasers make the most of Wall Street.

Stacks of coins growing higher, ending in a light bulb of an idea.

Image source: Getty Images.

1. High yields are usually too good to be true

If you run a stock screen and sort for the highest payouts you're literally asking for trouble. The beefiest yields are typically bountiful for a reason. In this climate where low interest rates are the norm you're not going to find a sustainable high yield without a catch.

Even once you work through the tangle of complicated limited partnerships, closed-end funds, and REITs with bright payouts but dim prospects, you're looking for trouble if you aim too high. Even recognizing a name can be a yield-chasing mistake. 

ExxonMobil ( XOM -2.28% ) may seem like a can't-miss opportunity with its 10.4% yield. You should be somewhat familiar with the crude oil and natural gas giant, but do you realize that the stock has shed roughly half of its value in 2020? Investors approaching ExxonMobil at the beginning of the year with its 5% yield may have thought they were buying into a Dow Inc. component with pedigree papers, but they've lost half of their stock value for a stock that was ultimately replaced in the Dow Jones Industrial Average. With consumption trends and profitability going the wrong way it's not realistic to bet on a turnaround anytime soon.  

2. Don't sleep on capital gains

If chasing yields can be dangerous it also follows that dismissing low-yielding stocks can be a missed connection. Let's try NVIDIA ( NVDA -2.67% ) on for size. The pioneer of GPU-accelerated computing's $0.16-a-share quarterly distribution doesn't amount to much given the stock's triple-digit price tag. However, don't judge a story's book by its payout cover. 

NVIDIA's yield was less than 0.3% at the start of 2020, and it's now even more yawn-worthy at a little more than 0.1%. However, the yield has been cut by more than half because the stock has more than doubled this year. NVIDIA shares have soared 124% as gamers, scientists, and designers flock to its solutions. Income investors may have glossed over NVIDIA with its pedestrian yields, but it would take you roughly two decades of a stock marching in place with a 5% yield to achieve the gain that NVIDIA investors have experienced in less than a single year. Income is nice, but capital gains are better. 

3. Find the right balance of reasonable yields and growth

Set your sights lower on the payout front, and you may find a company with strong prospects to keep boosting its distributions as its bottom line improves. NextEra Energy ( NEE -0.16% ) with its 1.9% current yield will be at the low end of the universe of utility stocks, but it's worth a look. 

As a Florida power utility it's in a state where the population is growing, and that obviously matters. It's also the world's largest generator of renewable energy from the wind and sun, making it a no-brainer for the future of power generation. Analysts see earnings climbing at an annualized clip of 8% through the next four years, so the dividend rate that has moved higher for 25 consecutive years should keep moving in the right direction. 

Big dividends are nice, but sustainable payouts in improving companies will always be better. Investing in dividend stocks should always be more about your actual investment than the distributions. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$60.18 (-2.28%) $-1.41
NVIDIA Corporation Stock Quote
NVIDIA Corporation
NVDA
$324.85 (-2.67%) $-8.91
NextEra Energy, Inc. Stock Quote
NextEra Energy, Inc.
NEE
$88.52 (-0.16%) $0.14

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
673%
 
S&P 500 Returns
142%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.