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How to Develop a Dividend Investing Strategy: A Comprehensive Guide

April 17, 2023

Read Time 10 MIN

Learn how to develop a dividend investing strategy that generates a steady stream of passive income. Follow these actionable tips and advice to start building your portfolio today.

What is Dividend Investing?

Dividend investing is a strategy that investors use to generate a steady stream of income from their investments. Dividend investing primarily involves buying stocks in companies that pay regular dividends, which are essentially payments made to shareholders out of the company's profits.

Dividend investing is a popular investment strategy because it can provide investors with a source of regular income and the potential for long-term growth. By investing in dividend-paying stocks, investors can receive a regular stream of income in the form of dividends, which can help to supplement their overall investment returns. In addition, companies that pay dividends tend to be more established and financially stable, which can make them less risky than companies that do not pay dividends. Over the long term, dividend-paying stocks have also historically outperformed non-dividend-paying stocks in terms of total return. This is because companies that pay dividends tend to be more profitable and have more consistent earnings growth, which can lead to higher stock prices and capital appreciation over time.

Overall, dividend investing can be a great way for investors to generate income, achieve long-term growth, and reduce portfolio risk. In this guide, we will provide an overview of common dividend investing strategies, explain how to create a dividend investing plan and analyze dividend stocks, and share the benefits and risks of dividend investing.

Understanding Dividend Investing

Dividends are a distribution of profits that a company makes to its shareholders. When a company generates excess earnings, it may choose to distribute a portion of those earnings to its shareholders in the form of dividends. Typically, dividends are paid out quarterly or annually and are a way for companies to reward their shareholders for investing in their business. Dividend payments can range from small amounts to significant portions of a company's earnings.

Companies can pay out dividends in different ways, depending on their financial situation and priorities. The most common ways companies pay dividends are:

  1. Cash Dividends: This is the most common form of dividend payment. Companies distribute a portion of their profits to shareholders in the form of cash, usually on a quarterly or annual basis. The amount of the cash dividend is typically expressed as a fixed amount per share or as a percentage of the company's earnings.
  2. Stock Dividends: Companies may also distribute dividends in the form of additional shares of stock instead of cash. This is known as a stock dividend. The number of additional shares that a shareholder receives is usually based on the number of shares they already own, and the dividend is expressed as a percentage.
  3. Property Dividends: Property dividends are another way that companies can distribute profits to shareholders. This can include physical assets, such as real estate, or other securities, such as bonds or stocks in other companies.
  4. Special Dividends: A special dividend is a one-time dividend payment that companies may distribute to their shareholders in addition to their regular dividend payments. Special dividends are usually paid out when a company has excess cash or has sold off assets, and they are not typically part of the company's regular dividend policy.

Overall, companies have the flexibility to choose how they pay out their dividends based on their financial situation, cash flow needs, and priorities for reinvesting earnings back into the business.

Benefits and Risks of Dividend Investing

Dividend investing strategies offer investors many potential benefits. For example, over the long term, dividend-paying stocks have historically outperformed non-dividend-paying stocks in terms of total return, providing investors with the potential for long-term growth. Dividend investing can also help to compound investment returns over time, as investors can reinvest their dividends back into the company to purchase additional shares of stock.

Overall, dividend investing can be a sound investment strategy for investors seeking income, growth, and a measure of stability in their portfolios. However, it's important to note that not all companies pay dividends, and the decision to pay dividends is at the discretion of the company's management team. Additionally, the amount of the dividend can vary from quarter to quarter and is not guaranteed. Investing in high dividend yielding companies can come with additional risk. In some cases, a company offers a high dividend yield because shareholders demand a high share of profits due to low or even negative growth prospects. In addition, many dividend paying companies, particularly those with reliable and/or high payouts, are widely owned by income investors. As a result, many of these companies can trade at lofty valuations.

Analyzing Dividend Stocks

If you invest in dividend-paying stocks, it’s important to understand that the market may shift, and a company's dividend yield may not always be a reliable indicator of its future performance. Investors should carefully research and select companies with sustainable dividends, solid financials, and a strong track record of dividend growth. Whether seeking investment in the highest yielding stocks, companies that consistently pay or grow dividends, or a combination of the two, investors are susceptible to the pitfalls of dividend investing, known as “dividend traps.”

The term dividend trap refers to a company that lures investors with impressive, but ultimately unsustainable payouts. Dividends are not guaranteed and even long-time dividend paying companies are susceptible to reducing or cutting their dividends altogether. Unhealthy companies put an investor’s income stream and principal at risk. Financial distress can lead to dividend cuts or suspensions, share price depreciation and bankruptcy. Additionally, overpaying for yield has become a serious concern. Buying into stock positions at inflated prices can destroy returns when they revert back to fair value.

Retrospective financial metrics have proven to be a poor gauge of a company’s future earnings performance and dividend sustainability. However, many dividend strategies still rely exclusively on screens for historical dividend payments or historical dividend growth. Selecting companies based on their history of paying is backward-looking and does not account for future prospects.

A more prudent approach also considers business fundamentals. Companies in businesses with secular growth drivers that have clear competitive advantages, low leverage and strong management teams are better equipped to maintainable profit over time—even in a tougher macroeconomic and market environment. Carefully selecting dividend paying companies based on their dividend yields coupled with an assessment of their fair value and balance sheet strength may allow for a portfolio with more potential upside (capital appreciation) while still maintaining an attractive dividend yield (income stream).

How to Create a Dividend Investing Plan

Creating a dividend investing plan involves several key steps that are critical to achieving long-term success. First, investors need to assess their risk tolerance and determine how much of their portfolio they want to allocate to dividend-paying stocks. This can be influenced by a variety of factors, including age, income, financial goals, and investment experience.

Once an investor has determined their risk tolerance and portfolio allocation, the next step is to choose the right investment vehicles for their dividend investing plan. This may involve investing in individual stocks, exchange-traded funds (ETFs), or mutual funds that specialize in dividend-paying companies. When selecting individual stocks or funds, investors should consider factors such as the company's financial health, dividend history and growth, and the current dividend yield.

Dividend investment strategies can play an important role in a broader portfolio allocation by providing investors with reliable income streams and helping to diversify their investments. One of the primary benefits of dividend investing is the steady income it provides. Because dividend payments are often paid out on a regular basis, they can offer a reliable source of income for investors seeking to supplement their other income sources. This can be especially important for retirees or those living off of their investments, as dividend payments can provide a stable income stream that is less affected by market volatility.

Common Dividend Investing Strategies

Common dividend investing strategies include dividend growth investing, dividend value investing, and dividend income investing. These strategies invest across different types of dividend-paying stocks, including those of blue-chip companies, dividend aristocrats, and high-yield dividend stocks.

VanEck Durable High Dividend ETF (DURA®) is a high dividend yield strategy that seeks to track the Morningstar US Dividend Valuation Index, which screens and weights companies based on dividend yield. The index’s process of considering financial health and valuations help address the potential risks of investing in high yielding companies.

High dividend yield strategies focus on companies with high payouts. These strategies tend to offer higher yields than dividend growth strategies and often offer very different exposures. High dividend yield strategies tend to offer value-oriented exposure, while dividend growth strategies tend to provide blended exposure to growth and value companies.

Dividend growth strategies target those companies that have managed to grow their dividends over time. These strategies don’t necessarily seek companies with high dividends, but rather consistent dividend growth. Many investors look to these strategies because of the implied financial stability offered by companies that operate in a way that allows them to increasingly share profits with shareholders. However, selecting companies based on their dividend growth history is backward-looking. Beyond selecting companies with a high dividend yield, forward-looking assessments of financial health is a key component to the long-term durability of dividend pay-outs.

Implementing Your Dividend Investing Strategy

Dividend payers may serve investors best when investors screen for factors that may signal trouble ahead, such as financial health. The VanEck Durable High Dividend ETF (DURA) tracks Morningstar’s US Dividend Valuation Index, which evaluates financial health using Morningstar’s Distance to Default score. Distance to Default is a measure of financial health that considers a company’s balance sheet strength and equity market data to assess the likelihood of bankruptcy. Distance to Default has proven to be an effective predictor of dividend cuts: those companies with the lowest probability of default have had the lowest probability of future dividend cuts, according to Morningstar.

Financial health is a critical consideration for equity income investors. Buying high-yielding shares without regard for the company's ability to sustain its dividend payment is a risky proposition. From financial services and housing-related industries in 2008-09 to commodities and materials in 2015, to a wide array of companies challenged for more idiosyncratic reasons, history provides ample cautionary tales of dividend traps. As a dynamic, market-driven measure of financial health, Distance to Default is an effective screen to help investors avoid balance sheet deterioration. Investors can use it to identify companies whose dividends are at risk. Data from the past 15 years shows that companies with better Distance to Default scores are likelier to sustain their dividends. It has flagged a number of companies spanning sector and geography that have gone on to cut their dividends. As a group, dividend-paying stocks remain good investments, but investors must remember to never prioritize yield at the expense of long-term total return.

Common Dividend Investing Mistakes to Avoid

The most common mistake dividend investors make is falling for “dividend traps.” Selecting companies based on their history of dividend payments is backward-looking and doesn’t account for their future prospects. In addition, overpaying for yield as more investors have allocated to and bid up prices for dividend stocks can lead to underperformance over time.

Investors can avoid these mistakes by choosing a dividend investing strategy that considers a company’s long-term financial health and valuations.


By investing in companies that pay regular dividends, investors can build wealth over time and reduce their risk exposure, making it a valuable tool for anyone looking to grow their portfolio.

Approach dividend investing from a position of strength. Chasing the highest yielding stocks can lead investors to “dividend traps” and companies unable to sustain payouts. Selecting companies based on their history of paying is backward-looking and doesn’t account for their future prospects.

Beyond selecting companies with a high dividend yield, forward-looking assessments of a company’s current valuation and financial health are key components to the long-term durability of dividend pay-outs and growth potential.

Learn more about the VanEck Durable Dividend ETF (DURA).

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