Reflecting on Your Investment Strategy for 2024: Lessons for Picking Winning Dividend Stocks
As we approach the end of another year, it’s the perfect time to evaluate your investment journey. This reflection should include analyzing your portfolio, identifying lessons learned, and making strategic moves before the year closes. Diving into specific sectors—like growth, value, or dividend stocks—could uncover valuable insights that enhance your investment choices for the coming year.
Lesson 1: Understand the Importance of Earnings Growth
The cornerstone of successful stock investing is earnings growth. This metric can transform what may initially seem like an overvalued stock into a worthwhile investment. A company with strong earnings growth creates a ripple effect, leading to increased shareholder value through enhanced innovation, dividend hikes, and stock buybacks.
For dividend investors, a common pitfall is chasing high dividends without considering the underlying earnings growth. If a company distributes all its earnings as dividends while aggregating debt, it could signal trouble ahead. Therefore, look for dividend-paying companies that grow their earnings at least as fast as their payout.
Take Procter & Gamble (NYSE: PG) as an exemplar. This Dividend King boasts a remarkable record with 68 consecutive years of dividend increases. Over the last decade, its earnings per share have outpaced its dividend increases, highlighting a sustainable growth strategy. This strategy not only protects shareholders but also fosters long-term investment growth.
Lesson 2: The Power of Consistency
Consistency is crucial when selecting dividend stocks. In an unpredictable market, investors often seek stocks that provide stable returns. While growth stocks offer higher potential returns, they can also introduce volatility and uncertainty. Conversely, dividend stocks often appeal to those focused on reliable income streams, particularly retirees or those nearing retirement.
Consistent performers often yield impressive total returns over time. For instance, P&G’s total return—achieved by compounding stock price appreciation and dividend reinvestments—has soared by 155% over the last decade. This illustrates how consistency in both earnings growth and dividend payments can yield substantial value over time.
Lesson 3: The Yield on Cost Concept
When assessing dividend stocks, investors often fixate on the current yield. Yet, focusing solely on the present dividend yield can obscure the real potential of an investment. Enter the concept of yield on cost (YoC), which is calculated by taking the annual dividend payment divided by the original purchase price of the stock.
To exemplify this, consider Sherwin-Williams (NYSE: SHW). If you had purchased this stock five years ago for $192.85, your yield today would be 1.5%, a far cry from its initial dividend yield. However, had you kept your shares over the long term, that yield on cost would reveal the true value of your investment, highlighting how a stock’s appreciation can dramatically influence your returns.
Similarly, Microsoft (NASDAQ: MSFT) is another stock that illustrates this concept well. Initially bought at $151.75 per share, Microsoft’s recent growth means your yield would be approximately 2.2%, far exceeding current market yields. Over ten years, it could reach a staggering 7% YoC, providing an attractive source of passive income irrespective of current valuations.
Final Thoughts
While high yields might catch your eye, it’s essential to prioritize the quality of the underlying companies behind those dividends. A strong dividend is only as stable as the organization that pays it. Therefore, focus on companies that align with your investment beliefs and values, and then evaluate the strength of their dividends.
By adhering to these principles—emphasizing earnings growth, seeking consistency, and incorporating the yield on cost into your analysis—you can build a robust dividend portfolio that emphasizes quality over quantity. Remember, the goal is not just about generating income but about fostering long-term wealth through sound investment principles.
Using insights from the Extreme Investor Network ensures that you stay informed and equipped to navigate the complexities of the stock market effectively. Investing doesn’t have to be a solo endeavor—leverage our expertise as you prepare for a prosperous investment year ahead.