7 Amazing Tips on Dividend Growth Investing for Beginners

If you’re approaching or are in retirement already, then you’re probably considering buying dividend stocks. These can grow and throw some cash your way regularly.

However, dividend growth is not something only the older folk should think about. Even if you are on the younger side, while the conventional advice often handed out is to bet on high-growth stocks that might not payout any dividends, dividend stocks investment is still a fantastic way to diversify.

With a constant and growing cash flow stream, dividend stocks can allow an investor to use the cash to meet their day-to-day needs or reinvest the cash with the goal of compounding their interests.

Like most investing principles, investing in dividend stocks is really not that difficult. Once you get over the learning curve, you’ll find it’s easier to navigate than you may have thought.

Looking to get started? Read on for seven amazing tips on how you can grow your dividend investments as a beginner.

Assess Growth Potential

Good investors assess their dividends growth potential. To analyze this growth potential, not only will you have to know how much free cashflow per/share of the company can grow over time but you’ll also have to analyze the payout ratios of the company.

All this will come down to the growth prospects analysis of the underlying business, which will then need you to review management’s capital allocation policies, margin expansion potential, total addressable market and the competitive advantages of the company.

Basically, all you’d usually need to assess when reviewing any dividend, stock payer.

Know The Rules

Different stocks have different rules as far as dividend payouts are concerned. For example, aside from the regular common stocks which everyone usually knows about, you can also get your hands on special-classed dividend-producing equities the likes of Business Development Corporations, Real Estate Investment Trusts and Master Limited Partnerships.

All the above mentioned high-yield investment classes have different rules for how they are taxed and how many dividends they’re required to payout.

Invest In Things You Understand

A stock screener will help you apply the quantitative filters you’ll need when making such investments. Once you’ve screened all the possibilities out there, make a list of all the dividend stocks that have the potential to grow.

Carefully evaluate and scrutinize this list of companies you’ve jotted down and then only try to pick the businesses that you can say you truly understand.

It’s key in financial planning you ask yourself some of these very important questions:

  • Do I know their product?

  • Do I fully understand the business model they’re using?

  • Do I know how the business makes money?

Is That Particular Stock Reasonably Valued?

This is arguably among the most vital factors of any good dividend growth investment strategy. You’ll want to look at dividend stocks that have outstanding upside potential even though they may possess limited downsides.

If you want to find these types of stocks, look for the ones that are well-known for being shareholder-friendly. Next, run what you’ve picked through a thorough quantitative analysis, that should include the below list of criteria for finding dividend stock that that has been undervalued:

  • EBITDA/Enterprise Value ratio of below 10x

  • Price/Earning Per Share ratios of below 20x

  • Stocks that have been increasing dividend by at least five percent per year for a long while

Know The Dividend Growth Investment Coverage Ratio

Once you’ve identified the dividend stock, you’re interested in buying, look at how safe that dividend is. For that, you must look at such things like cash dividend payout ratios and payout ratio.

Traditional payout ratios will tell you what the percentage of the net income the company has earned is given out as dividends. For example, a twenty-five percent payout ratio will mean that the business is basically handing out dividends that equal twenty-five percent of the net income earned.

The remaining seventy-five percent is left available for paying down debt, stock buybacks, or reinvestment in growth. Well, at least in theory that is. However, you can also look at the payout ratio related to the free cashflow of the company as a measurement to analyze how safe the dividend is.

Safety First

All these measures listed above can be used to judge both the growth and health of a dividend stock, as well as help assess its risks. For example, yes you might find a company that sports a high-yield, but you might find out later that it may be forced to decrease dividend payout for growth investment or in order to reduce debt if it’s a shrinking or stalling business.

A lot of people out there have been burned chasing those large dividend yields, only to end up losing a large chunk of principal when the business starts cutting down the dividend payouts. This tip is arguably one of the most important tips of them all, even though it’s way down here. It should be in the mind of every budding investor and that includes you if you’re a beginner that is.

Don’t Overthink Your Stock Portfolio

If you’re just starting out, choose simple investing platforms that don’t push you to overthink or overtrade your investments. Remember, you ideally want to be whatever you’re in for the long haul. And, if that’s the case, then there’s no need to be checking your account daily, is there?

With that said, being able to receive a notification here and there is still quite helpful, especially when there’s something big that’s going on. You can consider getting all your stock related data getting pushed to you instantly.

Why Does All This Help?

For starters, we know that dividend stocks reduce by fractions every day. However, that doesn’t mean some of them don’t have brighter futures in the long term. You need to know how to reinvest income back into the portfolio to help ensure dividend growth for yourself.

Stick to it. Before you know it you’ll be enjoying the peace of mind that your retirement is covered and then some. Check out our blog for more information and inspiration to help you manage your finances.

About RJ Frometa

Head Honcho, Editor in Chief and writer here on VENTS. I don't like walking on the beach, but I love playing the guitar and geeking out about music. I am also a movie maniac and 6 hours sleeper.

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