- Dividend investment strategy
- How much money do you need to live on dividends and not work
- How to choose dividend stocks
- 1. Invest in Russian and foreign stocks
- 2. Invest in cyclical and non-cyclical industries
- 3. Buy blue chip securities
- 4. Choose “dividend aristocrats” from “blue chips”
- 5. Check the odds of the stock you want to buy
- Advantages of a dividend strategy
- Cons of a dividend strategy
- How to buy dividend stocks
Maxim Mairovich, an investor with twelve years of experience and Investlab columnist, told how to invest in stocks using a dividend strategy. He listed the pros and cons of this approach, and also gave instructions on choosing dividend stocks.
Dividends are part of a company’s net profit that it directs to shareholders.. But they are not required to pay, – says Maxim. Profits that can be given as dividends are invested by some corporations in business development: technology development, research, modernization or asset construction.
Here are a few major market players that do not have dividends: Yandex, Mail, Tesla, Netflix. You can earn on them in this way: buy shares, wait until they grow in price and sell shares.
Dividend investment strategy
The dividend strategy is a conservative investment approach. It helps to generate passive income, get an increase in salary, or even provide yourself with a pension. Investors who follow this strategy are looking at the size and frequency of dividend payments rather than the stock’s upside prospects.
To create passive dividend income, invest regularly and for the long term. At first, it is better to reinvest dividend payments back into stocks. This way you can build capital faster.
Don’t speculate. Some investors buy dividend stocks one or two months before the payout, receive it, and then sell the paper. This approach does not work well because of the dividend gap – the fall in the share price by the amount of dividends the next day after the payment.
For example, the share price before dividends is 100 rubles, the dividend payment is 10 rubles, the share price after the payment is 90 rubles. As a result, they earned 10 rubles on dividends, but lost 10 rubles due to the dividend gap. Yield remained zero. The price after the gap is not restored immediately. Sometimes it takes several months.
How much money do you need to live on dividends and not work
It depends on the level of your monthly expenses and the size of the dividend yield of a particular company. The average dividend yield on Russian stocks is 8%, on US stocks – about 3%.
According to research by the Romir holding, the average Russian family needs 85,000 rubles a month for a normal life. This is 1 million 20 thousand per year. To receive such an amount from dividends, you need to invest about 13 million rubles in Russian shares.
True, if 50 thousand a month is enough for you, then you can invest less, about 8 million rubles. US dividend companies, which have lower yields, need 2.5 times more money. It is also necessary to take into account that income in the form of dividends is taxed at 13%.
Of course, not everyone is ready to immediately invest such amounts. Therefore, form the size of the dividend portfolio gradually. Use part of your salary and dividends that you receive to buy stocks until you reach your goal.
How to choose dividend stocks
Investing is a risk, but it can be easily reduced if you properly allocate money among different assets. And to select companies with stable dividends, focus on special indicators.
1. Invest in Russian and foreign stocks
Invest in different countries. If the portfolio contains companies from one state, then investments are exposed to country risk.
In the case of Russia, these are new sanctions that may affect the work of companies. Therefore, in addition to Russian securities, add European and American dividend stocks to your portfolio.
2. Invest in cyclical and non-cyclical industries
Cyclical industries are industry, metallurgy, construction, and air transportation. Such industries fall when the economy is in crisis and grow when the economy recovers.
Non-cyclical industries – healthcare, telecom, electric power, sale of essential goods. Demand for the services of non-cyclical companies does not depend on market shocks. Because people always have a need for treatment, communication or electricity, even during times of crisis.
Keep a portfolio of at least three industries from each category, dividing the budget equally between them.
3. Buy blue chip securities
This is the name of the largest companies in the market with a stable business and stable financial performance. Example: Gazprom, Sberbank, Norilsk Nickel, Lukoil, MTS, Coca Cola, Exxon Mobil, McDonald’s, Procter & Gamble.
Of the three cyclical and three non-cyclical industries you have chosen, buy 2-3 blue chips. So, in total, your portfolio should have 12-15 companies.
4. Choose “dividend aristocrats” from “blue chips”
This American companies, which transfer and increase payments for more than 25 years in a row. In Russia, the stock market is very young and therefore we do not yet have real “dividend aristocrats”. However, you can pay attention to these companies:
- Lukoil – pays dividends for 23 years in a row.
- Gazprom – pays dividends for 20 years in a row.
- NLMK – pays dividends for 19 years in a row.
- MTS – pays dividends for 19 years in a row.
5. Check the odds of the stock you want to buy
To make a dividend strategy work, use a few simple metrics to help gauge the health of a company and see if it will pay out in the future.
Debt/Equity – the ratio of a company’s debt to equity. The less debt, the better. If a company is over-indebted, there is a risk that it will not be able to pay off its debts, let alone pay dividends. The normal value of the coefficient is not more than 150%. This means that the company has 60% debt and 40% equity.
ROE – return on equity. A ratio that shows the efficiency of a business. Imagine that there are two companies that produce 100 units of products, but the first one uses one factory for this, and the second two factories. This means that the management of the first manages the business more efficiently, it requires fewer resources. The ROE value must be greater than the inflation percentage. For Russia, this is 5-6%, and for the USA – 2%.
Payout Ratio – the ratio shows what part of the net profit the company gives to dividends. Ideally, this is from 40 to 70%. If the ratio is less than 40%, the company will pay small dividends. If more than 70%, then it invests little in development, and this can have a bad effect on business.
Average dividend yield. This figure should be higher than inflation. I remind you that for Russian companies it is more than 5-6%, for American companies it is more than 2%.
I look at all odds through broker Tinkoff Investments. True, they are available only to those who opened a brokerage account with him. An investor needs a broker to enter the stock exchange. Without it, it is illegal to buy or sell securities.
The investor’s transactions are taken into account on the brokerage account, and dividend payments are automatically received there. To receive dividends, you do not need any special actions. You just need to own the shares and wait for the payout date.
Advantages of a dividend strategy
- Stable and predictable earnings. One of the main factors why the dividend strategy is so popular with investors. Even if the stock does not rise in price, you will still receive income through dividends.
- You don’t need to sell shares to use the money. There is no need to think about when to sell securities in order to withdraw profits. Money comes to the account, and you just have to decide what to do with it – spend it or reinvest it.
- Simple Selection Criteria. The presence of dividends and basic analysis makes the company attractive for investment.
- The work of compound interest. If you reinvest dividends back into stocks, then the return on investment will constantly grow.
- Large corporations seek to increase the size of dividends because their business grows. For example, over the past ten years, ALROSA has increased payments by 27 times.
Cons of a dividend strategy
- dividend gap. After the payment, the share price falls, and it is difficult to predict the timing of its recovery.
- taxes. The state will withhold 13% personal income tax from the amount of dividends that will be sent to you.
- High payouts are not always good. Companies use dividends to attract investors to buy their shares. If they are higher than the market average, this may indicate that the company has problems and wants to compensate for this through the influx of new investors, increasing dividends.
- Dividends may stop paying. Aeroflot did just that in 2020. The crisis is due to COVID-19. Although before that the company paid them for three years in a row.
How to buy dividend stocks
I buy through Tinkoff Investments. It is the largest broker in Russia in terms of the number of clients. It has many services for beginners: investment ideas from analysts, ratings of popular securities, ready-made collections with dividend stocks.
Broker commission for transactions from 0.025%. There are no other fees, such as account maintenance. To find out when the company will pay dividends, you can see the “Investor Calendar” section.
- Using the login and password that will be sent to you by SMS, go to your personal account.
- Find the securities you need in the catalog, fund your account with a card and buy them.
- You can also track quotes or sell shares through the cabinet.
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Read: How to become an investor in the stock market