Why Invest in Dividend Stocks?

profit ahead

I realized that it is necessary to write about the reasons behind why I choose to invest in dividend stocks as my strategy in building wealth. Though, Dividend Investing is more popular in the United States, I am optimistic that this strategy will equally work-profitably in the Philippine Stock Market. Does anyone of you doing dividend investing strategy? I hope we can discuss our experiences here as we go along our journey towards financial freedom.

As an Overseas Filipino Worker (OFW), one of my goal is to build up my wealth as soon as possible. When I say wealth, it’s not simply about having a lot of assets, it’s about generating a significant amount of passive income that grows over time.

Putting Up a Business

I believe putting up a business is one way, if not, the best way to build our wealth. Indeed, I had put up three small businesses so far. Two of these are giving me an ample amount of passive income while the other one I decided to stop its operation due to the incompetence of the manager I hired.

With the closure of my third business and a timely introduction to me of the stock market, I realize that stock market could be a good business as well. Buying a share of stock in a company has no difference from what I have been doing in my businesses since I hire other people to manage the business that I put up for I am still working outside the Philippines (so I can be well capitalized).

 Stock Market as my new Business venture

I got motivated with the idea that once you bought a share of stock in a certain company, you are then a part OWNER of that company. Wow! I can own many businesses while I’m still an OFW. The challenge now is to define what strategy to implement before investing in the stock market?

Investment Strategy

Investing strategy depends on the type of the investor. In the Philippines, I often heard of the following strategies:

  • Buy and Hold. Buy and hold strategy involves buying company shares and hold them for a long time.
  • Peso Cost Averaging. The peso cost averaging strategy is designed to reduce the risk of suffering substantial losses resulted when the stock was bought just before the market falls.
  • Value Investing. The value investing strategy looks at the intrinsic value of a company and value investors seek stocks of companies that they believed are undervalued.
  • Market Timing. Market timing is usually used by the day traders (active traders) attempting to maximize their return.
  • Dividend Investing. Buying a Dividend Stock and holding while continually getting a dividend income.

So, Why Dividend Investing?

I am not against with any of the strategies mentioned above. In fact, I want to use them all. Yes, TO USE THEM ALL. I will incorporate the first four listed strategies above into the Dividend Investing. Why? Simply to ultra-maximize my return (wishful thinking).

Though, I’m still in the process of building up my Dividend Portfolio nevertheless I sense comfort with Dividend Investing, in a way that I don’t really need to put most of my time monitoring the ups and downs of the stock market price. In fact, I can’t monitor all the time during trading hours due to my 12-hours daily job (pardon, not really everyday – my work cycle is 4 Days work/4 Days Off). Monitoring the market action after the trading hours is not an issue in dividend investing.

My previous blogpost, a comparison of return between Dividend Stocks versus non-dividend stocks, shows how the dividend stocks leads in reaping the returns. Even, one stock reaps an overwhelming 1,600% return, wonderful, right? But then again just a reminder that this will not guarantee for the future performance. A detailed study is a MUST before you invest your hard earned money.

Another thing that I like in Dividend Investing is that, aside from price appreciation, the dividend income that you’re collecting can be re-invested hence, that will give you a passive income that grows exponentially each year and at the same time builds your net worth over the long term.

Security during Market Lows

As we all aware, stock market price is moving like a roller coaster. Everybody is happy when the price move upwards but many would panic whenever the price declines. The movement in price doesn’t affect much the dividend investor knowing we still get dividends and even have the opportunity to buy more shares when the price is low, Peso cost averaging and Market Timing strategies applies here. However, we MUST dutifully check the value of the stocks we’re holding to ensure that the stock value still holds to be favorable – here you will apply the Value Investing Strategy.

CONCLUSION

Apparently, the dividend investing strategy takes time and discipline. I would say, patience and perseverance is the key to success in dividend investing. Further, we need to develop a robust investing plan. We need to identify companies that will provide good earnings over time.

Some time ago, I read from one of the blogger (unfortunately, I forgot to take note of his blogsite 🙁 ) sharing his views in finding a good dividend growth stock for your portfolio. The following is what his general principles that are worth looking for when investing in dividends:

  • A good dividend growth company has a product or service that you can foresee existing and being relevant for many decades to come. Time is very important to allow passive income to increase, so it’s wise to find a company that is built to last forever.
  • The company should have unique aspects that separate it from competitors.
  • A strong balance sheet is the hallmark of a good dividend investment, because it increases the chances of your company being able to survive and grow.
  • Keep in mind the general estimation that the total rate of return will be equal to the dividend yield plus the sustained dividend growth rate. Some investors like high-yielding stocks with lower dividend growth while others like lower-yielding stocks with higher dividend growth, and some prefer a mix of both, but keep this basic guideline in mind.
  • The company’s stock should be reasonably priced. A good company can make a bad stock if it is over-priced relative to its fundamental value. If you buy stock in an overvalued company, your returns are likely to be less than the sum of dividend yield and dividend growth. If, instead, you buy quality undervalued companies, your returns may be greater than the sum of dividend yield and dividend growth.
  • You should be able to understand the company. My view of investing is about individuals taking control of their finances, so if they don’t really understand their stocks, they aren’t really taking control of their finances.

How is the idea of investing in dividends to you? Does it sounds more profitable, easy, and hassle-free strategy?

Thank you for reading and looking forward for our success in all our endeavor!

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