The Motley Fool

Want to be a Dividend Investor? Follow These Steps

Investors may feel confused as to how to adopt a successful dividend investment strategy. But I can assure you it’s not tough – all you need is an understanding of which companies pay dividends and then build up your portfolio slowly but steadily.

Take a measured and steady approach to constructing your portfolio. Small steps are recommended in case an investor’s capital is limited and this can then be grown over the years by deploying increasing amounts of capital and compounding the dividends received. Here is a step-by-step guide on how you can start investing for dividends.

Select dividend-paying industries and companies

The first step is for the investor to draw up a list of dividend-paying companies on the stock exchange. This can be done quite easily using the stock screener function on the SGX website, which allows one to tweak the dividend yields for all listed companies. By setting the minimum yield to be higher than your target dividend yield (for example, 3%), you can then screen out a list of companies which pay a historical dividend yield higher than 3%.

Assess sustainable and consistent dividends

The next step is to filter out companies that may not have a history of sustainable or consistent dividends. The rule here is simple – go for blue-chip companies or real estate investment trusts (REITs) that have a solid track record of paying regular dividends and whose business is doing well.

Investors should take time to download at least a few quarters of earnings reports from each company of interest to ensure their dividend prospects are bright and, most importantly, can be sustained.

Inject capital slowly and build your portfolio

Once a list of companies has been identified for investment, investors should deploy their capital slowly and steadily. Make sure you obtain equal exposure to all companies in your portfolio – an example (for a portfolio of ten selections) would be 10% of your funds in each of the 10. For more insights on how to construct and maintain a portfolio, you can check out this article for ideas.

The Foolish bottom line

The above is a simple guide on how investors can screen out companies in order to construct a dividend-focused portfolio. It’s definitely practical to start small and to inject capital in stages as this frees investors from the need to worry about investing a large amount of money into the market at one point in time. By reinvesting the money received from dividends, investors can steadily grow their portfolio size over time.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.