In this episode, I answer your top 4 dividend investing questions:
- Why should I invest in dividend stocks?
- Why should I invest in undervalued stocks?
- How long does it take for a stock to go from undervalued to overvalued?
- How should I build a dividend stock portfolio?
Disclaimer: The views and opinions shared on this channel are for informational and educational purposes only. Simply Investing Incorporated nor the author and guests shall be liable for any loss of profit or any commercial damages, including but not limited to incidental, special, consequential, or other damages. Investors should confirm any data before making stock buy/sell decisions. Our staff and editor may hold at any given time securities mentioned in this video/course/report/presentation/platform. The final decision to buy or sell any stock is yours; please do your own due diligence. Stock buy or sell decisions are based on many factors including your own risk tolerance. When in doubt please consult a professional advisor. No advice on the buying and selling of specific securities is provided. All trademarks, trade names, or logos mentioned or used are the property of their respective owners. For our full legal disclaimer, please visit our website.
In this episode, I answer your top 4 dividend investing questions:
- Why should I invest in dividend stocks?
- Why should I invest in undervalued stocks?
- How long does it take for a stock to go from undervalued to overvalued?
- How should I build a dividend stock portfolio?
Disclaimer: The views and opinions shared on this channel are for informational and educational purposes only. Simply Investing Incorporated nor the author and guests shall be liable for any loss of profit or any commercial damages, including but not limited to incidental, special, consequential, or other damages. Investors should confirm any data before making stock buy/sell decisions. Our staff and editor may hold at any given time securities mentioned in this video/course/report/presentation/platform. The final decision to buy or sell any stock is yours; please do your own due diligence. Stock buy or sell decisions are based on many factors including your own risk tolerance. When in doubt please consult a professional advisor. No advice on the buying and selling of specific securities is provided. All trademarks, trade names, or logos mentioned or used are the property of their respective owners. For our full legal disclaimer, please visit our website.
In this episode I'm going to be answering your top four most frequently asked questions about dividend investing. Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend Podcast. In this episode, I'm going to cover your top four most questions about dividend investing. And so the first question you might be thinking is why should I invest in dividend stocks? Next, we're going to answer the question of why should you invest in undervalued stocks, meaning when they're priced low. And then the next question we'll look at is how long does it take for a stock to go from undervalued to overvalued, meaning priced low to priced high? And then the last question we'll look at in this episode is how should I build a dividend stock portfolio? So let's begin with question number one why should I invest in dividend stocks? So the big question is why dividend stocks at all? Why not look at stocks that don't pay any dividends? So to answer this question, we have to step back a little bit and start at the beginning. So we're going to do a very quick review of what are stocks and how do you make money from them. Sorry, what are dividends and how do you make money from them? So we're going to jump right into dividends, and then we'll show you how to make money and income from dividends. So a dividend is essentially the company sharing its profits with you, the shareholder, and so the dividend is just a fancy name for the profits that are shared with you, the shareholder, and as a shareholder, you're essentially part owner of the company. So in this example, if a company is giving a dividend of $1 per share and you own a thousand shares, you will receive $1,000 every year for as long as you own those shares and as long as the company continues to pay the dividend, regardless of the stock price and we're going to cover that in this episode and see what happens to the dividend when the stock price goes up and down. Now you can spend these dividends as you wish or you can reinvest them. That's entirely up to you. The money gets deposited directly into your trading account, so that is essentially cash that you are earning for being a shareholder of a stock that is paying a dividend. So then let's take a quick look at dividend yield. We're going to do a quick recap and then we're going to continue with our episode.
Speaker 1:So what is dividend yield? It's essentially the annual dividend divided by the share price or, more specifically the purchase price of when you buy those shares. And so, if you do the math, that will give you the dividend yield. So, for example, let's say the dividend is $1 per share and the share price today is $20 and you happen to buy the shares today at $20 a piece, then 1 over 20, we want to express that as a percentage is 5%. So what does the 5% really mean? So take a look at this example on the screen. If you were to invest, let's say, $20,000 in this stock, 5% of $20,000 is $1,000. So you would receive $1,000 every year in dividends for as long as you own those shares and as long as the company continues to pay the dividend, in this case of $1 per share. So the dividend yield is the return on your investment while you hold on to those shares. Again, regardless of stock price can go up and down. But if you bought the shares today, in this example, at $20 a piece and the dividend is $1 per share, then your dividend yield will be 5%. Of course, if the dividend goes up, then your dividend yield will be higher. So now the good thing is, you don't have to calculate the dividend yield yourself. It's done for you automatically here on the screen, you can see a screenshot from Yahoo Finance, and you can get that also from Google Finance or any other sites where you can get stock prices. In this example, we're looking at Coca-Cola on the screen and, as of this recording, you can see that the dividend the forward annual dividend is $1.84 a share and the dividend yield is 3.08%. So that's a very quick way to figure out the return on your investment while you hold on to those shares.
Speaker 1:Now some of you might be wondering and I do get questions about this all the time is that dividends are not guaranteed, and that's true. Companies are under no obligation to pay you a dividend. They can reduce the dividend whenever they want or they can eliminate the dividend whenever they want. So then, how do you have any confidence in investing in dividend stocks? And that confidence was shaken during COVID. We saw that in 2020, especially in March of 2020. Some companies reduced or eliminated their dividend, so this scared away a lot of investors, scared them away from investing and scared them away from dividend stocks. But here's the truth Most of the companies the majority of the companies did not reduce or eliminate their dividends. In fact, they increased their dividends even in 2020. So I've been doing this for over 23 years as a dividend investor and I can tell you that my dividend income has gone up every single year, including during COVID in 2020, during 2008-2009 financial crisis, in 9-11, when the stock market was closed for a number of days, and other downturns that we've experienced in the last 23 years, but my dividend income has continued to go up. So let's take a look at some other numbers here, which hopefully should give you confidence in investing in dividend stocks.
Speaker 1:Now here's a short list of companies. The actual list is much longer, but this is just a very short list of companies and you might recognize some of them on the list. We have Coca-Cola, we have Colgate Palm Olive, stanley Black Decker, procter Gamble. A lot of big companies are on this list and you can see the year in which they first started paying dividends, and this is incredible. Coca-cola started a dividend in 1893. So that's not a typo. They started the dividend in 1893. That's incredible. And if we look at Colgate Palm Olive, they started in 1895. Stanley Black Decker 1876.
Speaker 1:So there's companies on this list that you can see on the screen that have been paying dividends for more than 120 years, and that's an incredible track record, but what's even more important than that is what I'm going to show you right now on the screen. It is the consecutive years of dividend increases. So we can see here Coca-Cola has had more than 60 years of consecutive dividend increases. Think about how many market crashes, how many market downturns we've had in the last 20, 30, 40, 50, 60 years. But yet companies like these have continued to increase their dividend year after year after year. So, of course, there are no guarantees when it comes to dividends, but when we look at the list of stocks that you see in front of you on the screen, we can have some level of confidence that companies like these will continue to not only pay us a dividend in the future, but also to increase the dividend year after year after year. Now remember every time the dividend goes up, that's more money in your pocket. So what's the takeaway here? The important thing is high quality companies, well managed companies, have a history of increasing dividends. So what does a dividend increase mean to you? Well, I just said that a couple of seconds ago. It means more money in your pocket. You didn't have to buy more shares, you just held on to the shares you had, but now, with a dividend increase, you are going to get more dividends than you had gotten in the previous year.
Speaker 1:Let's take a look at a real life example, a quick example with Johnson Johnson, so you can see here the last 15 years. I'm showing you on the screen is the annual dividend per share. So back in 2008, johnson Johnson had an annual dividend of $1.80. The dividend today, as of this recording, is $4.76 a share and on the screen here you can now see the dividends received for, let's say, 1,000 shares. So if you owned 1,000 shares in Johnson Johnson back in 2008, you would have received $1,800 that year in dividends. As of this recording, in 2023, you would have received over $4,700 in dividends just by holding on to those shares. So that's an incredible 164% increase in dividends in the last 15 years, just with Johnson Johnson.
Speaker 1:Now let's take a quick look at the last 40 years. So now we're gonna go back a little further and we're gonna stick with our example of Johnson Johnson. And you can see here, over the last 40 years, since 1985 and a little before that, you can see the stock price has gone up and down and that's the blue line, and stock prices go up and down all the time and in some places you can see the stock price dropping by $5 a share, $10 a share, maybe even $15 a share. Drop in the stock price over the last 40 years. You can see it in the graph. Stock prices drop. But what has happened to the dividend? And that's the orange line the dividend has gone up every single year, not just stayed the same, but increased every single year.
Speaker 1:So how can a company afford to keep paying the shareholders a dividend when it's stock price tanks? And the reason is the dividends are not paid from the stock price, they are paid from the earnings. So as long as the company is profitable over the long term, the earnings have gone up over the long term, then they can continue to pay a dividend over the long term and to increase the dividend consistently. So J&J has an impressive track record of 60 years of consecutive dividend increases. So one of the key things here to understand to obtain extraordinary returns, there's three things you're going to need. So money, of course. The more you have to invest, the more you can make a dividends Time. So the longer you stay invested, the more money you can make, because over time the dividends go up and they increase. And if you can take those dividends and reinvest them back into other companies that pay dividends and grow the dividend, then you can earn more dividend income and that's dividend growth. Right, that's the last piece up on the screen. So money time and dividend growth If we put all three of them together you can start to see extraordinary returns.
Speaker 1:I'm going to give you three examples here. We'll stick with Coca-Cola, we're going to add Home Depot and Walmart. So with total investment and I'm going to show you some numbers in the next slide but let's say you invested $8,350 many years ago total $8,350 total across these three companies Today you would be receiving over $921,000 a year in dividends and the shares today would be worth over $47 million. So let's take a look at some of the numbers. Here we're going to go way back, of course, to the 1960s, 1970s and 1981. So if you had invested $4,600 in Coca-Cola back in 1960, today that investment would be worth over $7 million, but it would provide you with over $202,000 a year in dividends. Now we're going to take a look at Home Depot and that's $2,100 invested back in 1981 at Home Depot Today would be worth over $10.8 million and it would provide you with over $259,000 a year in dividends. So now we're going to look at Walmart, and that was a $1,650 investment back in 1970. Today would be worth over $29.2 million and provide you with $458,000 a year in dividends. And so that's how we come up with the combined annual dividends across all three companies as a little over $921,000 a year annually in dividends. If you want more information about these three companies and about the numbers, I cover all of that in episode 7 so you can go back and watch that.
Speaker 1:But the point I want to get across here is that extraordinary returns are possible with dividend stocks. So then, why a dividend stock? So we've covered a lot of reasons why. Let's just summarize them now up on the screen here. So dividend stocks provide you with reliable and growing dividend income each year, regardless of the stock price. We saw that with Johnson and Johnson. The 40-year chart Some places the stock dropped by $5, dropped by $10, dropped by $15 a share, but yet the dividend was reliable and it was consistent and it was growing every year. So that's what you get is the dividend income.
Speaker 1:Our focus as dividend investors is more on the dividend income than it is on the stock price, so that's an important differentiation when it comes dividend investing. Now, dividends can also provide you with protection against inflation, because they generally tend to outpace inflation over the long term, and I cover that in detail in episode number 11. So go ahead and watch that if you're interested in learning more Dividends, again outside of your. If you're in Canada, you'll have the RSP or TFSA, where the dividends will grow tax-free anyway, but outside of those accounts. And in the US you've got the 401k or the IRA account I believe it's called or the Roth. They're gonna grow tax free anyway, but outside of those accounts, generally, dividends are taxed lower than interest income or even capital gains.
Speaker 1:Now, with dividend stocks, you can still buy low and sell high if you want to, and so you could also get not only the dividends but take advantage of any capital gains, which is to buy low and sell high. Which brings us to our next topic and next question is why should I invest in undervalued stocks when prices are low? Why would you want to do that? Well, you can see up on the screen here stock prices go up and down all the time, and we are long-term investors. We want to buy and hold for the long term because dividends grow and it takes decades for dividends to get bigger and bigger. But if you wanted to, you could sell some of your shares when they're overvalued or priced high. So you can see that on this graph here. You want to ideally, buy when the stock price is low. When it's price low doesn't mean there's anything wrong with this stock, necessarily, but when it's price low you want to be able to buy it there and then have the option, if you want it, to sell when the price is high. So that makes sense.
Speaker 1:Let's see what that looks like if we take a look at an example. So we're gonna give you a fictional company here, stock XYZ. We're gonna look at it when it's priced high and when it's priced low. So the annual dividend you can see on the screen is the same. It's $2 a share in this example. So the dividend is exactly the same. The stock price you can see when it's price low is $40 a share. When it's priced high it's $185 a share. So, right there, you might be thinking, well, yeah, why would I want to pay more for the same stock? Okay, but let's continue.
Speaker 1:Let's see what happens here. You can see the dividend yield. Remember the yield we talked about at the beginning of the episode. It's the annual dividend divided by the share price. So, because the share price is high, when the stock is overvalued, the dividend yield is only 1%, whereas when the stock is price low, the yield is 5%. So, all things considered equal, you would rather earn 5% on your investment than 1%.
Speaker 1:Let's take a look at the amount invested. So let's say you were going to invest $10,000 and you had the option to buy the stock when it was price low or buy it when it was priced high. So let's see what that would look like. So if you bought it when the stock was undervalued, priced low, you'd be able to buy 250 shares, whereas if you bought it when the price was high, when it was overvalued, you'd only be able to afford 54 shares for the same $10,000 investment. So you can see where I'm headed now, because now we're going to look at the dividend income, and the dividends are always based on the number of shares you own. So you can see here, if you bought the shares in stock XYZ when it was priced low, when it was undervalued, you would earn $500 a year in dividends. If you bought it when it was overvalued, the same $10,000 investment, you would only make $108 a year in dividends.
Speaker 1:So it makes sense, all things considered equal, to purchase a stock when it's priced low, when it's undervalued, because you can buy more shares. And if you have more shares you'll make more dividend income. In this example, 5% a year versus just 1% a year. So how do you know when a stock is priced low, when it's undervalued, and how do you know when it's priced high, when it's overvalued? So it's quite simple the current dividend yield. We take a look at that. If it's higher than the stock's 20-year average dividend yield, then we consider the stock to be priced low, undervalued. And the opposite is true. If the current dividend yield is less than or equal to the 20-year average dividend yield for that stock, then the stock is priced high and it's overvalued. So for more information on that how do we figure that out, why this approach works I would suggest you go back and watch episode 1. It is dedicated to to helping you figure out very quickly when a stock is priced low and when a stock is priced high. So I would highly recommend watching episode number one.
Speaker 1:Let's move on to our third question in this episode how long does it take for a stock to go from undervalue to overvalue, because a lot of people want to know well, is it a couple of weeks, months, years? How long does that take? And, as I said before, stock prices go up and down all the time. So you can see on our graph here in front of you on the screen, you can see over time we're going to see fluctuations in the stock price. But the short answer is on average it's about five years. So some companies may take two years or three years and go from undervalue to overvalue and then go back to undervalue. Some stocks may take six, seven or even eight years. The average seems to be around five years. It's not an exact science. It's going to be different for every stock, so you have to be patient.
Speaker 1:When it comes to dividend investing, let's move on to our last and final question in this episode. You might be thinking well, how should I build a dividend stock portfolio and not just any portfolio? You want to make sure that you build a resilient portfolio that provides a growing stream of dividend income each year. Remember, the dividend income is what's important to us, more so than the stock price. So we want to see the income growing every year and a resilient portfolio that's not affected by a market crash or a market downturn. So how do we do that? We do that by investing in high quality, dividend stocks that are priced low. We don't want to buy it at any price, we want to buy it when it's priced low. So how do you know, when you're looking at a stock, if it's a high quality stock and how you know when it's priced low? So for that I created what I call the 12 rules of simply investing. You can see them up on the screen here. I'm going to go through them in just a minute, but right now they're just up on the screen, the 12 rules.
Speaker 1:But I want to finish off this portion of our segment in the episode to help you build a stock portfolio, because that was the question how do we build one? So you want to start off by building a diversified portfolio. Never put all your eggs in one basket, all in one stock or in one industry or one sector. Over time, you want to build a diversified portfolio to reduce your risk In case there is a sector or a stock that just tanks. So build a diversified portfolio. Then you want to hold for the long term and for the rising dividend, because as the dividend is increased over time, the stock price is going to start to creep up, and that's what we want. We also want the stock price to go up, but we want and we want the dividend income to go up every year. So that takes time. It doesn't happen in weeks, months or even years. It takes five, six, seven, ten years or more, and so it takes time to build up.
Speaker 1:Remember to avoid panicking when the stock market tanks and we know it will. Stock markets go up, stock markets go down and we have market corrections, market crashes. When that happens, you have to avoid panicking. Remain calm. You may have done all your homework and applied the 12 rules and bought a stock for $35 today and tomorrow it drops to $30. That's okay If you've done your homework. It was a quality stock. It's priced low. It's fine because you're holding it for the long term. The worst time to sell is when the stock market is down. When the stock prices are down. That's the worst time to sell, because then you solidify your losses. So avoid panicking.
Speaker 1:Instead, remain disciplined and patient. Disciplined means stick to the approach. We always want to apply the 12 rules before we invest in any stock. I'm going to show you what the 12 rules are in just a minute. So we don't want to cut corners and skip that. We don't want to jump from one strategy to another strategy every couple of months.
Speaker 1:Stick to the strategy. I've been doing it for over 23 years. A lot of other investors have been doing it for decades and decades. It works, but you have to stick to it. You have to be patient. I said avoid panicking. You have to be patient to ride out any market downturns. So stock prices are going to go up. They're going to come down. They're going to go up, come down. The value of your portfolio is going to go up and down. So be patient. As long as the dividend income is going up every year, you should be fine, right? We don't want to panic and sell at the worst time possible.
Speaker 1:So we're going to stick with our approach, which is to build a dividend portfolio consisting of high quality stocks when they're priced low. Now they can. Once you've purchased it, the price can go up. That's fine. Doesn't mean you should sell it right away. We're in it for the long run. We're in it for the dividend income. But at the time of purchase, the stock should be priced low.
Speaker 1:So how do you know when it's priced low? How do you know when it's undervalued? How do you know when it's a quality stock? Well, so for that, like I said before, I've created the 12 rules of simply investing. They're up on the screen here. Rule number one Do you understand how the company is making money? If not, skip it, move on to something else. This is your checklist. These 12 rules are your checklist. So a company has to pass all of the 12 rules in order for you to invest in it, not just nine out of 12 or eight out of 12 has to pass all. If there's one failure, skip it, move on to something else.
Speaker 1:Rule number two 20 years from now, will people still need its product and services? Rule number three Does the company have a low cost competitive advantage? Rule number four Is it recession proof? Rule number five Is it profitable? Rule number six Does it grow its dividend? Rule number seven Can it afford to pay the dividend? Rule number eight Is the debt less than 70%? Rule number nine Avoid companies with recent dividend cuts. Rule number 10. Does the company buy back its own shares? Rule number 11. Is the stock priced low? That's what we've been talking about this entire episode is is the stock undervalued? So there's three parts to rule number 11. We look at the PE ratio, we look at the PB ratio, the price to book, and then, of course, we compare the current yield to the 20 year average yield. If the company meets all three conditions, it passes rule number 11. And rule number 12. Keep your emotions out of investing.
Speaker 1:So, for those of you that are interested, I have an online self-paced course simply investing course. It covers all of the 12 rules and much more. You can see on the screen here. We have 10 modules. We start with the investing basics. In module two, you learn the 12 rules and how to apply them. In module three, using real life examples. Module four I show you how to use a simply investing platform. Module five I'm going to show you how to place your first stock order If you've never done it before, step by step. Module six Building and tracking your portfolio. Module seven when to sell your stocks, which is just as important as to when to buy. Module eight Reduce your fees and risk, especially if you have ETFs, index funds and mutual funds. Module nine your action plan to get started right away. And in module 10, I answer more of your frequently asked questions.
Speaker 1:For anyone who is interested, I also have the simply investing platform, which we spent two years to build. It's an online platform Subscription service where we apply the rules to over 6,000 companies in the US and Canada every single day, so you can immediately log into the platform and see which companies are priced low, which ones are priced high, so you can avoid those, which ones are high quality. How many of the rules do they pass? How many of the rules do they fail? So if you're interested in any of those the course or the platform write down the coupon code save 10, save10. This is going to save you 10% off of the course or the platform itself. If you enjoyed this episode, be sure to hit the subscribe button. We have a new episode out every week. Hit the like button as well, and for more questions or anything else more information, please take a look at our website, simplyinvestingcom. Thanks for watching.