Six Dos and Don’ts Of Income Investing

Dividend investing is a strategy that is close to my heart. The following, then, are some of the rules that I adhere to. They are in no particular order of importance. They are all important.

Rule Number 1: Don’t check your shares too frequently

Checking prices daily when you are investing for income for three years or more is a bit like planting a seed and inspecting it every hour. With share markets forever abuzz (more so recently), noise gets mistaken for signal, and overtrading is the result. Sit on your hands if you must. But the easiest way is to not tempt yourself in the first place.

Rule Number 2: Do make a plan and adjust it infrequently

Investing is like starting a garden: clumsy results stem from buying whatever catches your eye at your local garden centre. Gardens need a plan, and a proper investing plan considers how your stocks relate to each other. Knowing what you need and what you don’t helps you to pounce on the best deals (especially in volatile markets).

Rule Number 3: Don’t anchor on the price you paid for a share

It is arbitrary to everyone but you.

Rule Number 4: Do forget the “flavour of the month” shares

There is a big danger buying shares in companies just because everyone is talking about them. If everyone is talking about them, then their share prices are likely to be high. The time to buy is when companies are out of favour because that is when the shares are likely to trade at attractive valuations. Did someone say REITs?

Rule Number 5: Don’t focus on the yield and yield alone

It can be a mistake to go for the highest-yielding shares, especially those that that yield significantly more than the market average. So look for companies that may not have super-high yields but, instead, have reliable yields that do not depend on strong economic growth.

Rule Number 6: Do remember that you can reinvest your dividends elsewhere

There is no law that says you must put dividends back into the companies that paid them. If you feel another share in your portfolio is better priced, it could be better to divert one company’s payout to top up a position in another.

You might be wondering, at this point, why I like income investing? It is really quite simple.

I believe that my portfolio of dividend shares will generate income forever, if not longer. That is an infinite number of reasons for holding onto the shares in the good companies that I bought at a good price, for as long as they remain good companies.

A version of this article first appeared in Take Stock Singapore. Click here now for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.