A Beginners Guide to Buying Dividend-Paying Shares
It is common wisdom that a stable, sensible investment portfolio should have a heavy weighting towards income stocks. That is, companies that pay dividends. Relying on strong capital growth is a risky business but if shares pay out steady dividends you can’t go too wrong. That is backed up by recent research in the form of the Barclays Equity Guilt Study. It demonstrated that £100 invested in 1899 across a basket of shares chosen to reflect the changing composition of the London Stock Exchange, 119 years ago, would be worth £204 today when adjusted for inflation.
That’s less than 1% a year ahead of inflation in returns over almost 120 years. Not great. However, when dividends being reinvested
So, the moral of the story is that compounding returns by reinvesting dividends is key, right? The logical extension would then be that the sensible investor chooses to invest in the companies that offer the highest dividends. However, that can be a dangerous trap to fall into. The companies offering the highest headline dividends don’t always offer the best returns. In fact, it can be a warning that the company is no longer growing. Markets don’t like companies that are no longer developing and their share price is in danger of falling under those circumstances. This could lead to high
A good example of a headline dividend luring investors
A better tactic is to pursue companies offering middling but sustainable dividends or rising dividends. These companies are likely to be investing in growth and over the long term stand a better chance of delivering superior total returns than the highest dividend payers. 26 of the FTSE 100 companies have increased their dividends year-on-year for more than a decade. That’s
So the key to successful income investing is, don’t be too greedy for dividends. Look for companies likely to start paying dividends soon, have just started paying them and are growing strongly or have a history of consistent incremental dividend growth over a sustained period of time. There are exceptions to the rule but huge headline dividends are offered for a reason. The company is not growing and needs to resort to dividends to encourage investors in.
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.