Dividend Investing: Focus On Yield, Not Share Price

By Kevin (Staff Writer), on December 15, 2009

When it comes to long term investing, I believe that you should focus more on dividend yields and cash flow versus speculation and share price appreciation. While this might mean avoiding sexy names like Apple (AAPL) and Amazon (AMZN), there is nothing unsexy about constant cash flow with regards to your assets.

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Dividend Income Is More Stable

When it comes to sustainable investment income, dividend payments are much more stable than share price and capital gains. While dividend payments can be cut by companies that are in trouble as in recent years, it is a rare thing and most companies do everything possible to avoid a dividend cut. Even with dividend cuts from a select few companies (namely financials) over the past few years, you still fared better than the overall drop in share price.

Additionally, dividend yields historically tend to increase along with inflation, making it inflation protected income. In an inflationary environment, businesses pass on the costs to their end consumers which results in comparable growth in revenues and profits. This allows companies to continue to increase the dividend payment along with inflation.

If you focus on dividend yields, you will be much more likely to buy stocks at very depressed prices (which is when you should buy them), because you will see a higher yield. When you’re focused on share price, you will tend to avoid the stocks because of a falling share price. When it comes to long term, cash flow focused investing, share price fluctuation means nothing; so maximize lower share prices and lock in high yields for years to come by buying stocks low.

What This Means For Non-Dividend Stocks

Because we’re buying a cash flow for dividend stocks, what are we actually buying for the non-dividend stocks? Well, you’re buying the opportunity of selling the stock at a higher price than you bought it (hopefully). Because you aren’t earning any cash flow from the position, the only way you can make money from the position is to sell the stock at a higher price than which you bought it. This requires effective trading skills and/or sound forecasting. Most individuals investors lack both.

It is very hard to earn profits on non-dividend stocks for the reasons I just shared. As such, focus on high dividend stocks over a long term perspective. Instead of trying to build up the overall balance of your equities account, build up the monthly or quarterly income of your portfolio from your dividend stocks. By tracking the income growth of your portfolio, you can also make projections on if and when you can live off your investment income.

For an example dividend portfolio, check out the Dogs of the Dow, a portfolio that attempts to invest in the highest yielding Dow components each year. This is a great starting point for new investors.

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Kevin is the writer behind 20smoney.com. 20smoney.com focuses on aggressive investing, developing income streams, money management and more with advice targeting 20-somethings. You can read more about his investing and financial philosophy.

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