Dividend stocks

The Dividend Strategy🔗

Investing in the stock market isn't necessarily about seeking capital gains in the hope that a stock will rise. Another source of return, often underestimated by beginners, is the dividend. When a company decides to share a portion of its profits with its shareholders, it generally does so in the form of a dividend. These regular payments are the basis of the strategy of many investors, both individual and institutional.

What is a Dividend?🔗

A dividend is a sum of money paid by a publicly traded company to its shareholders, generally through the issue of its profits. There are two main types:

• Cash dividend: the shareholder receives money directly into their securities account.
• Stock dividend: the company offers to receive the dividend in the form of newly issued shares.

The dividend amount can be expressed in two ways:

Dividend per share (DPS)🔗

Fixed amount paid for each share held.

Dividend yield🔗

Ratio between the annual dividend and the current share price. Example: if a share costs $100 and pays $5 in annual dividends, its yield is 5%.

Dividends can be paid:

• Annually (common in Europe).
• Quarterly (common in the United States).
• Monthly (less common, but highly sought after by some investors seeking regular income).

Why be interested in dividend-paying stocks?🔗

Dividend-paying stocks are attractive for several reasons:

Regular income🔗

A dividend provides a forecasted cash flow, which is highly valued by retirees and long-term investors.

Signal of Solidity🔗

A company capable of paying a regular, or even growing, dividend often demonstrates good financial health and a stable business.

Total Return🔗

You can have both sides play: the potential increase in the share price and the passive income generated by the dividend.

Snowball Effect🔗

Automatically reinvesting dividends (automatically with accumulating ETFs) can accelerate portfolio growth over the long term.

What to look for before investing in a dividend-paying stock?🔗

Investing in a dividend-paying stock isn't about focusing solely on yields. A yield that's too high can mask significant risk. Here are the main elements to examine:

Dividend Yield🔗

Yield is often the first criterion observed. But be careful: a stock with a high dividend (e.g., 10% or more) can be a value trap. An exceptionally high dividend may mean that the stock price has collapsed due to financial difficulties.

The Payout Ratio🔗

The payout ratio measures the proportion of profits distributed as dividends. Example: if a company earns $10 per share and then pays $5, its payout ratio is 50%.

• A ratio between 30% and 60% is generally considered healthy.
• Above 80%, the company distributes almost all of its profits, which can be risky in the event of a downturn in business.

Dividend Regularity and Growth🔗

Some companies stand out for their decades-long dividend policy (e.g., Johnson & Johnson, Coca-Cola, The Coca-Cola Company, and Procter & Gamble). These are the famous Dividend Aristocrats.

The Company's Financial Strength🔗

Even if dividends are the main focus, you should always consider:

• Debt level.
• Free cash flow generation.
• Revenue stability.

Companies that pay high and consistent dividends🔗

The American Dividend Aristocrats🔗

These are S&P 500 companies that have increased their dividends every year for at least 25 years. Among them:

• Coca-Cola (KO): Uninterrupted dividend since 1920! One of Warren Buffett's favorites.
• Procter & Gamble (PG): 65 years of continuous dividend increases.
• Johnson & Johnson (JNJ).
• 3M (MMM).

Major European Groups🔗

• TotalEnergies (France): Generous dividends, even during oil crises.
• Nestlé (Switzerland): Exemplary regularity.
• Sanofi (France).

Listed Real Estate Investment Trusts (REITs)🔗

REITs (Real Estate Investment Trusts) are required by law (particularly in the United States) to distribute a large portion of their profits. Examples:

• Realty Income (O): nicknamed The Monthly Dividend Company because it pays a monthly dividend.
• Simon Property Group (SPG).

Telecoms and Utilities🔗

• Verizon, Eversource Energy
• Engie, Enel, Iberdrola.

These companies operate in stable sectors with recurring revenues.

Case of companies that do not pay dividends🔗

Some companies, although extremely profitable, pay little or no dividends. They prioritize retaining profits to finance their growth: technology, biotech, startups.

Example:

• Apple has long preferred to buy back its own shares before resuming dividend distributions.
• Amazon and Alphabet (Google) do not pay dividends: they reinvest massively in their growth.

For these companies, investors are betting solely on the potential appreciation of the stock price.

High-dividend stocks vs. stable dividends🔗

A high-dividend stock is attractive for its immediate return. But you have to ask yourself:

• Is it sustainable?
• Can the company continue to pay out as much if its profits decline?

Sometimes, a stock with a modest but regular dividend, with annual growth, is better. In the long term, stability is more important.

Monthly dividend stocks🔗

Few publicly traded companies pay a monthly dividend. But they do exist and attract those who want a recurring income close to a salary.

Examples:

• Realty Income (O): undisputed leader.
• STAG Industrial (logistics REIT).
• Certain Canadian real estate companies.

Additional indicators to look at🔗

• Debt-to-Equity Ratio
  Excessive debt can threaten future dividend payments.

• Free Cash Flow
  A dividend is healthy if it is financed by recurring cash flow and not by debt.

• Price/Earnings Ratio (PER)
  Allows you to determine whether the stock is overvalued or undervalued relative to its earnings.

• Historical Performance
  Compare the stock's performance over the past 5 to 10 years.

Points to Watch🔗

• Beware of Yield Traps: A dividend that is too high is often a warning sign.
• Taxation: Depending on the country, dividends are subject to withholding tax and/or a flat tax.
• Company Policy: A company may reduce or eliminate its dividend in the event of a crisis (e.g., banks in 2008, airlines in 2020).
• Exchange Rate: Investing in foreign companies exposes you to currency risk.

Dividend-Focused Investment Strategies🔗

Dividend Growth Investing (DGI)🔗

Focus on companies that regularly increase their dividend.

High Dividend Yield🔗

Look for high-dividend stocks with significant diversification to limit risk.

Monthly Income🔗

Combine several monthly dividend-paying stocks or REITs to create a regular passive income.

The Best Dividend Stocks According to Investor Profiles🔗

• Cautious Investor: Large, stable companies like Nestlé, Procter & Gamble, Johnson & Johnson.
• Yield-Seeking Investor: TotalEnergies, telecoms, listed real estate companies.
• Long-Term Investor: Dividend Aristocrats.
• Monthly Income Investor: Realty Income (O) and other monthly REITs.

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