Dividend Investing

Dividend investing is an easy way to earn passive income. A $10,000 investment in a stock with a 5% dividend yield will provide you with $500 in yearly dividend income – all without you doing anything! So this is like an easy way to FIRE, which also stands for Financial Independence Retirement Early.

In fact, the best dividend stocks can boost your total returns over time through a combination of dividend payouts and stock price appreciation. Think of, an enhanced compounding effect!

But not all dividend stocks are a good investment. For example, a stock with a very high dividend yield might turn out to be a dividend trap.

Criteria for Choosing Dividend Stocks

So now, there are 5 indicators that helps us identify a good dividend stock

Outpace inflation with a robust dividend growth rate

The dividend growth rate measures the growth of a company’s dividend payouts over time. Stocks with sustained dividend growth can guard against inflation since the increase in dividends each year helps you preserve more of your purchasing power.

Using the calculation above, if a stock paid an annual dividend of $7 in 2021 and $8 in 2022, the one-year dividend growth rate would be 14%. Naturally, it’s also important to look at a stock’s dividend growth rate over several years.

Generally, a company that can consistently grow dividends by 5% to 10% every year would be considered good.