Sometimes, investing seems incredibly complicated. Many beginners start off great by reading books, blogs, asking questions but they sit on the sidelines for a while. They gain the knowledge, have the tools, but are still scared to pull the trigger on their first trade.

 

If you are in this situation or you simply have a hard time getting your head around everything you have read in the books, financial newspaper and dividend investing blogs, I’ve gathered my Top 5 dividend investing rules in a single article so you can bookmark it or print it.

 

I have kept my dividend investing rules pretty simple and straight to the point. There is no point of making this complicated. In the end, all you need is a handful of rules that will cover 80% of your investing strategy. The last 20% is managed by your gut feeling.

 

#1 Answer The  4 “WH” Questions

 

Before you invest a penny in the stock market, it’s important that you know the answers to the “WH” questions. These are quite simple, but take 5 minutes to answer them. Your dividend investing strategy will be based on your answers…

 

What?

The first question is what will you invest in? Dividend stocks? ETFs? Mutual funds? I kept my answer pretty straightforward with this one; I’m 100% dividend investing in stocks!

 

Why?

Why do you invest? Are you looking to fund your retirement? Create an additional source of passive income? Buy a house? Fund your children’s education? You must know why you invest before you invest. In my own case, I invest most of my money to fund my retirement. This is why I need to save a lot of money and manage it carefully. On the other hand, I have several years ahead so I can use the magic of dividend growth to make it happen.

 

When?

When will you invest? At the beginning of each year? Monthly? Or with a lump sum payment? Once you know when you will invest, you also need to know for how long. If you invest to retire in 20 years, your risk tolerance will be different that if you want to buy a house with that money in 18 months.

 

How?

How will you invest your money each time you have cash sitting in your bank account? This question can be put aside for a few seconds, just long enough so you can keep reading and get to dividend investing rule #2…

 

#2 Create Your Asset Allocation

 

Now that you have a good idea why you invest and for how long, it is time to know how you will invest your money. This is the purpose of setting an asset allocation. I personally go with 2 types of asset allocation. The classic one (whether if I invest in fixed income or equity) and the investing sector one. For example, I’ve decided to go 100% into equities. Then, I’ve taken a bet in the techno stocks knowing they will be highly volatile compared to consumer staples.

 

How Much Risk Will You Take…

Risk tolerance is everything when it comes down to asset allocation. This is the moment you decide if taking a slump of 20% over 12 years will affect your attitude or not. This rule is not to be taken lightly. If you are having problem determining your risk tolerance, I suggest you follow the investing steps within my exclusive and free newsletter; you will receive a complete email to answer all your concerns.

 

 

#3 How to Setup Your Stock Filter Properly

 

At this stage, you are ready to pick up your first stock. But in order to do this, you must find what you are looking for. Here’s my golden dividend investing rules I enter in my stock filter:

The Golden Rules…

Dividend yield over 3%

Positive 5 year dividend growth

Dividend payout ratio under 75%

Return on equity (ROE) over 10%

Positive 5 year annual income growth rate

Current price / earnings ratio (PE) under 20

 

This is enough to ensure that you create a list of very solid companies to start your research. By using a stock filter, you save time and make sure that most of the stocks in this list will be great investments. Therefore, you minimize your risk.

 

#4 When to Buy, When to Hold and When to Sell

 

All right, this is where most beginner investors struggle. They know why they invest and how much risk they are willing to take. They pull out a big nice list of great stocks from a strategy they studied but they are still struggling to pull the trigger and make their first buy. This is where this dividend investing set of rules comes in handy!

 

When to buy…

First, buy when you have money in your account. Then, look at your asset allocation and find what is missing. Use your money to buy this stock. This year, I wanted to add more consumer stocks to my portfolio mainly because I wanted to have a stronger core with less volatile stocks. As soon as I had the money, I look at my stock list and pick the most valuable consumer stocks I have found.

 

If you are starting your portfolio today, I would probably go for a dividend growth stock that has proven its stability such as a dividend achiever or dividend aristocrat. The “when” as specific as which month of the year or at what price is not a concern for me. Since I buy for the long haul, I don’t want to wait too long on the sidelines and would rather buy a stock that might dip in the following months but receiving my dividends in the meantime. After all, the point of dividend investing is to receive as much dividend cash as possible!

 

When to hold…

As long as the financial results are in line with the investing criterion set in your stock filter, there is no reason to sell. The company is doing well, sales are increasing steadily and the same case applies to profits and dividend growth: hold the stock. The point is to hold as many stocks as possible and as long as possible. This is how a dividend of 3% becomes a 9% dividend payout at retirement!

 

When to sell…

 

Dividend cuts, bad years ahead, slipping industry (hum… this reminds me of looking closely at Intel (INTC)!). These are all great reasons to sell. I sold Seagate Technology (STX) this year because I didn’t expect them to grow their sales in the upcoming years. I thought of finding a better investment while I was making a lot of money with this pick. I was wrong for now since the stock jumped by another $7 since I sold it but it doesn’t matter: I made money from a dividend play. Good thing the stock keeps going up so others can do the same. I’ve moved forward to another investment and I don’t look back.

 

I also wanted to diminish my exposure to techno stocks as I find them too volatile at the moment (you saw what happened to Microsoft MSFT when they released their last quarterly results?). This is another reason to sell; when the stock doesn’t fit your asset allocation model anymore.

 

Don’t use a +15% or -10% investing rule in your portfolio. You will prevent yourself from grabbing high return investments (several of my dividend stocks are showing +20% and more at the moment) and you may sell a stock at the wrong time (my Husky Energy went down almost 10% before showing positive returns recently). Sell because the stocks doesn’t meet or won’t meet your dividend investing requirements, not because the stock is down from your cost of purchase.

 

#5 Follow the Rules, Bend Them Sometimes, But Never Break Them

Having dividend investing rules is most important for a successful investor. Without rules, it will be very hard to show consistent results year after year. If you follow your investing rules to the letter, you will show much better returns. Then again, rules are no fun if they can’t be bent, right? This is why sometimes I will make a play on a stock that will be outside my dividend code. But this must not apply to all stocks in my portfolio. If you make a habit of bending your rules, they will break…and you will lose money.

 

As you can see, these are quite simple and easy to follow dividend investing rules. They don’t have to be complicated to be successful. If you want to learn more on how to use them and go further into building a dividend growth model, I suggest you buy my book Dividend Growth: Freedom Through Passive Income. It was written for that purpose!

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5 Comments   |  

5 Comments

August 8, 2013, 9:08 am

Great list of rules Mike. Do you ever make an exception on the 3%+ dividend yield? There are a lot of great companies out there right now in the 2.5-2.9% yield range.

August 8, 2013, 4:14 pm

TDG,

This is an awesome article. Concise, to the point, and actionable! So what companies are you buying these days?

DGI

Mike
August 9, 2013, 9:53 am

Hey Zach,

I do :-)

one of my non quantitative investing rules is to cheat and bend the rules sometimes :-)

This is how I bought Disney (DIS) and Coke (KO). If there is a great potential of dividend growth in the future, there is no problem of taking a stock with a lower dividend yield. It will eventually go higher than 3% :-)

Hey DGI,

I’ve made 3 trades last week, I’ll discuss them over the next few weeks on this blog :-) (hint: 2 sells, 1 buy)

August 13, 2013, 5:27 pm

Great rules…

Not too worried about dividend yield over 3%, since you get capital appreciation instead :)

Mark

August 19, 2013, 5:02 am

[…] it. Sometimes, we make bad investment choices. This usually happens when you don’t follow your investing rules. This is what happens, in my case, most of the times I don’t follow my investing […]

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