Tuesday 1 February 2011

The Power of Dividend Investing - Transcript

This is a review of a transcript of an interview with Todd Wenning, the Motley Fool's resident dividend investing guru (I have highlighted his 'Dividend Report Cards' in another post). This transcript is a useful summary of the advantages of dividend investing, which - as you will probably now be aware - is recommended as part of the approach for the DIY Income Investor (at Level 3 of the Income Pyramid - see separate posts for details).

Todd identifies two different types of dividend stocks:
  • 'dividend growth', where the companies still have a lot of growth left in them – examples are Tesco, Reckitt Benckiser, that pay around the FTSE 100/All-Share average in terms of yield, but they grow that yield or their dividend payout at about an 8 to 10% per year, so they have earnings growth potential. 
  • 'high yield', which are shares that yield over 50% the market average. So with the FTSE around 3% average, that's 4.5% average and higher examples include: Vodafone, National Grid. These companies pay a really high dividend, but the dividend isn't really going to grow, so you're buying those more for the current income than you're paying for the future growth in that income.
He also thinks dividend investing is appropriate for people of  any age, given the flexibility that dividends give -  the ability to reinvest and buy more shares, or to just simply save it as cash. So if you're an older investor and you're looking to collect that income and use it for living expenses you can do that. On the other hand, if you're a younger investor, you can take that dividend, reinvest, buy more shares, and then when you get to retirement you can have a larger pie to draw all your income from.

He also points out the potential dangers of investing in very high yield shares. If they're paying such high dividends, that means one of two things:
  • If the yield is high, it means that the stock price may be down, and that the market has concerns about the company long term.
  • Alternatively, if the company is paying an enormous yield, it means that it's not funding the projects to invest in that, or worth keeping the money rather than paying it out to shareholders.
...emphasising the importance of diversification: 15-20 different shares in different market sectors.

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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