Profiting from Dividends

I know I know investing in dividend companies aren't the sexiest investments, but trust me those dividends add up over time. Plus there are actually quite a few benefits when investing in quality dividend paying companies.

1. They're usually stable (i.e. utilities or telecommunications)
2. Dividends are taxed less than capital gains.
3. A DRIP (dividend reinvestment plan) will have a compounding effect.

It's also easier to manage because your objective is to collect the dividend stream and not worry too much about share price fluctuations. If the business is thriving, the company will raise their dividends. One of the best dividend stocks out there is McDonald, since the year 2000, they have raise their dividends by 28.2% annually, which means the payout doubles every two and a half years!

One more thing, invest in quality stocks (google dividend aristocrats for some examples). I learned my lesson when I invested in RBS pre-recession, at that time the dividend yield was 17%, however the dividend collapsed along with the dividend. So here a few tips to keep in mind when doing your DD.

1. don't chase high dividend yields - 5% should be the maximum, any higher is too risky
2. look at the dividend payout ratio (div./ net income) - make sure it's less than 55% or else the company can't grow
3. make sure the div. are consistent, preferably with increases at regular intervals

- The Hawk

Payout Ratio Checker:  http://dividendinvestor.ca/?symbol=t&submit=GO

Dividend Aristocrats:  http://www.thepassiveincomeearner.com/2011/01/dividend-aristocrats-canadian-tsx.html