Dividend investing focuses on buying shares of companies that return profits to shareholders through dividends. It is a cool feeling to see a message on the phone saying , “You received $XXX in dividends from XYZ company in your brokerage account. Even if it is pennies. It is just there is money coming to you.

Some people debate that it is better to invest in growth stocks and when you need money you can sell shares. There are differences in tax treatment and impacts on MAGI which affects subsidies for ACA (Affordable Care Act). Capital gains can be more controllable because you determine when you want to sell and recognize that gain. Dividends are generally quarterly and consistent. So the only way to control that income is dictated by the number of shares you have of a dividend stock.

Also, people debate the track records of total returns between growth stocks and dividend stocks (factoring reinvesting the dividends). However, I don’t want to get into the weeds on this subject. I’d like to just focus on what dividend stocks are and how to choose them.

As part of my strategy, I want a steady stream of passive income. And I plan to incorporate dividend stocks into my strategy. Actually, they will be my primary focus. Other forms of passive income seem to be a bit sketchy and I will go into those details later. These types of investments seem cool and sound great but once you start digging you realize (or at least I did) that they are not so hot. And lots of people promote them because they get referrals. Sure they tell you they get referral income so it seems like they are being honest, but some of the things they speak positive about suck.

One of the biggest things to worry about in picking a dividend stock is chasing high yields. This is coming from someone who does chase high yields (more on that later). Because if a company’s yield is high (unless it operates in a certain industry like Business Development Companies) it could mean that investors think the future of the company is poor so they have sold off the stock. Such a massive sell off will lower the stock price. And the yields are calculated on the stated dividends. So for example, XYZ company gives $5 a year in dividends. It currently trades at $100/share. So the dividend is 5%. But!!! Some bad news hits and the stock drops down to $25 dollars. Well in theory it is now yielding a whopping 20%. But if a company loses that much value, there is a chance it may cut the dividend to try to recover from whatever it was that caused the loss. So be careful of high yields.

Another key concern is what investors refer to as a value trap. Rather than I try to write something about what it is, I am gonna do the lazy thing and cut and paste and give credit. From wallstreetmojo.com, “A value trap is when the stock’s current price appears to be undervalued based on fundamental valuation parameters like Price to Earnings, Price Book Value, and Price to cash flow ratio over time; however, these stocks are not worthy investments.” AT&T is often mentioned as a value trap.

Strong companies grow their dividends every year The term Dividend King refers to a company that has grown dividends for at least 25 consecutive years. Patience and starting early is the key. Coca Cola paid $.88 in 2003. In 2023, it will pay $1.84 per share. But in those 20 years the stock price went up by almost 600 percent. 

Finally (for now), dividend reinvesting can be quite powerful. Just automatically reinvest your dividends from that stock back into the same stock (i.e. buy more shares). 

So much can be discussed about dividend stocks and I hope these links provide you a good start.