What are good long term investing strategies for dividend income?
I'm a 21 year-old college student looking to start investing for the long term. One of my goals is to invest in stocks that pay higher dividends so I can have additional income many years down the road. I've considered dividend reinvestment plans, direct stock purchase plans, and different types of mutual funds. I currently have a small brokerage account invested in a Target Date Fund, but this is tailored more for retirement purposes. What are some of the best high-dividend investments that I can make while I am young and have a longer time-frame?
If you are a young investor starting out with little capital, look at dividend paying exchange traded funds (ETFs). This way you can buy a basket of dividend paying stocks with one transaction. You can do a Google search and find many dividend ETFs. I have also included a website below that list many dividend ETFs. But it is not only about the "high" dividends, but the overall return known as the Total Return. Because even if you have a 7% dividend, if the fund or stock declines -20%, did you make money?
And the higher the dividend, theoretically, the higher the risk. Very large, strong companies don't have to pay higher dividends as many investors prefer safety. Just like bonds, investment grade bonds pay a lower yield than high yield junk bonds. This is because junk bonds have to pay higher yields to attract capital while the strongest investment grade bonds (companies) don't. This is somewhat true with stocks as well. So don't get lured by the dividend alone. Look at the underlying securities/stocks within the ETF.
This is not how I manage money, as dividend income is secondary or even incidental as many times it is about the company itself. Some of the greatest growth companies don't pay a dividend and I don't want to avoid them just because of this. Apple just began paying a dividend a few years ago & Amazon doesn't pay one, but they are both great companies. And there are many others. So you may want to consider a combination of growth ETFs and income ETFs, especially at your young age. As you grow your portfolio, you can add individual positions.
Hope this helps and best of luck, Dan Stewart CFA®
I know that I am expected to give an editorialized answer to your question so as to provide more information than you requested. But, since you asked for something specific, let me provide the same. You can purchase the following ETFs in your brokerage account:
Vanguard High Dividend Yield ETF (VYM): Tracks the FTSE High Dividend Yield Index consisting of high-yielding US stocks and has generally done well over multi-year periods.
iShares US Preferred Stock ETF (PFF): Relatively safe fund holding just under 300 different preferred stock issues. About 85% are issued by US companies and the UK and Netherlands make up most of the remainder.
Vanguard Dividend Appreciation ETF (VIG): Tracks the NASDAQ US Dividend Achievers Select Index which includes stocks that have grown their dividends for 10 years in a row or more. As a result, it leans toward large-cap stocks and limits individual stocks to no more than 4% of the index.
Thanks for asking such an intelligent question. For a longer time frame, you want dividends which are both sustainable and are growing. In addition, if you can have them in a tax advantaged account like a Regular or Roth IRA (best because it is tax free), you gain the advantage of having the dividends grow for a long period of time with tax advantages or tax free. I would not necessarily look at how high the dividend is, but how sustainable it is at that rate. It does you no good to collect a dividend for one year which gets cut or eliminated because of financial pressure on the company. As for high yielding investments, look at large oil companies, big banks, or large pharmaceutical companies as all offer nice sized dividends. Each entity has their own situation so you have to select wisely, but these are good places to start. I hope this answered your question to your satisfaction.
Yale Bock, CFA
Y H & C Investments
While dividend funds can help support the multiplied yield potential of compounding returns (aka "compound interest"), it's important to know as a young investor that many high dividend funds are considered Value funds rather than Growth funds.
Value funds can be a critical component in a well balanced portfolio, but they can have significantly less returns historically compared to Growth funds. Growth funds usually have low or no dividends but can provide a much higher overall return over many years due to capital appreciation. Having both types can help buffer slow or down economies while increasing your overall potential income.
Having a portfolio that is well diversified and automatically rebalanced can help to reduce risk and offer historically better returns than the average investor. This can be done for you in a variety of account types for a low fee at Betterment.
If you buy a stock, your long term profit will be a combination of two factors: price appreciation and dividends. Neither factor is preferable to the other. I say this because even though dividends are more or less a sure thing and price appreciation will happen unpredictably (and might not happen at all), a long term investor will reap the rewards of both factors. At your age you should not be seeking out dividends to the exclusion of growth.
Find companies who are well managed, financially sound, and growing. If they pay a dividend, you should expect that the company will raise its dividend regularly. Choose such a company over a higher-yielding company who is not growing or raising its dividend. And for goodness sakes do your own research. Funds will be fine for you until you have enough saved to be able to buy individual companies, but you are much better off with a diversified portfolio of individual companies.
(I am not a fan of target date funds, by the way. They tend to lump people of a certain age together regardless of whether they are the same in other important ways; and the fees are about double those of the underlying assets they hold.)