The Importance of Long-Term Planning for Wealth Building: A Focus on Dividend Stocks

In today’s volatile market, having a long-term plan is crucial for building wealth. Focusing solely on short-term gains may cause investors to miss out on significant opportunities that lie ahead. One such opportunity lies in dividend stocks, which offer a combination of security and profit potential.

Dividend stocks provide investors with a steady stream of income from their investments. These cash payments instill confidence in shareholders, leading to sustained buying pressure and reduced volatility. In essence, dividends serve as a means to increase wealth. In this edition of Market 360, we delve into the concept of dividends, their functioning, and the importance of selecting the right dividend stocks.

A dividend is a cash distribution from a company’s earnings that is directly paid to a specific group of shareholders. The timing and frequency of dividend payments are determined by the company, with most companies opting for quarterly distributions. However, some companies may choose to pay dividends semi-annually or annually. The company management announces the payment date, along with an ex-dividend date, which serves as the deadline for purchasing the stock to receive the payout. The announcement also includes the dividend amount per share.

Companies issue dividends as a way to communicate their financial health. Consistently paying dividends over an extended period indicates a company’s stability and strong fundamentals. Maintaining and increasing dividends is in the best interest of companies, as the funds distributed are often reinvested back into shares, providing support for the stock. Additionally, companies are currently flush with cash, using it for debt and stock buybacks, acquisitions, and dividend payments.

However, it is important to note that not all dividends are created equal. The dividend yield, which is the dividend amount relative to the stock price, can vary depending on the company and its stock price at a given time. While a double-digit dividend yield may seem enticing, caution is advised. Chasing high dividend yields without considering other factors can be risky. Unlike Treasury bonds or savings accounts, stocks do not guarantee the return of invested capital. Furthermore, there is no assurance that a company will continue paying dividends. Poor investment choices can result in capital loss as stock prices decline or dividends are reduced.

To mitigate these risks, the Dividend Grader tool becomes essential. Similar to the Portfolio Grader, the Dividend Grader utilizes a proprietary formula to evaluate stocks based on various criteria. These criteria include Dividend Trend, Dividend Reliability, Forward Dividend Growth, and Earnings Yield. The culmination of these factors provides a Total Grade, with an A- or B-rating indicating a “Buy,” a C-rating suggesting a “Hold,” and a D- or F-rating signaling a “Sell.”

In light of this, we present a list of ten dividend stocks with high dividend yields but hold an F-rating or D-rating in the Dividend Grader. Investors are advised to exercise caution and avoid these stocks.

When seeking quality dividend stocks, it is crucial to look beyond the yield and current dividend payment. Evaluating the company as a whole and its history of dividend payments is essential. Consistent and steadily increasing dividend payments are indicative of a strong company that effectively utilizes dividends to benefit investors.

For those interested in finding the best dividend growth stocks, the Growth Investor offers an entire portfolio of Elite Dividend Payers. To be included in this list, a stock must hold an “AA” rating, indicating an A-rating in both Dividend Grader and Portfolio Grader. These stocks possess strong fundamentals, buying pressure, and consistent dividend income, positioning them to outperform the market consistently.

In conclusion, building wealth in the current market requires a long-term plan. Dividend stocks offer a secure and profitable avenue for investors. However, not all dividends are equal, and careful evaluation is necessary. By utilizing tools like the Dividend Grader and considering a company’s overall performance, investors can identify fundamentally superior dividend stocks to enhance their portfolios.