Income (dividend) investors look for the same type of business that value investors look for. They want companies with a consistent operating history and stable business prospects. The main difference is that dividend investors prefer even more safety.
A dividend stock is usually a business that will no longer grow quickly. This does not mean that the company is in financial trouble. It means that it generates more cash than the management needs to make the company grow. The extra cash is paid out to shareholders in the form of dividends. Some industries are more likely to pay dividends than others. The utility sector is a great place to look for dividend stocks.
Dividend stocks should be evaluated in the same way as value investments. The one addition to consider will be dividend yield. The average dividend yield for the S&P 500 is 2% to 3%, but most income investors will search for a minimum of 5% to 6% dividend yield. Using the value strategy checklist will help you determine whether the company is likely to continue paying similar dividends in the future.
If you don’t need the income, reinvesting dividends can also yield great returns. Reinvesting means that you use the dividend payouts to buy more shares in the company. This will boost your returns while you own the stock and give you larger dividend payments in the future when you need them.
Income investing will usually not make you rich, but it will keep your money safe.