5 rules for investing in dividend stocks

Dividend stocks are getting a lot of attention at the moment and it isn’t hard to see why. In a volatile market, receiving reliable steady payments can seem attractive.

I own some stocks in my portfolio that pay dividends. With that in mind, here are five rules that I try to stick to when I’m investing in dividend stocks.

Be wary of big yields

The first rule for me when I’m investing in stocks that pay dividends is to be wary of stocks with big dividend yields. I think that buying a quality business is more important than buying a stock with a big yield.

Take British American Tobacco as an example. The stock currently has a very attractive dividend yield of 6.1%, but the share price has declined by 36% over the past five years. 

While a 6% dividend is attractive, if it’s attached to a business that is struggling, then it’s unlikely to prove a winning investment for me.

Be patient

Accumulating wealth by receiving dividends takes time. Whether a company’s dividend yield is 2%, 4%, or 9%, I’m not going to be able to grow my wealth quickly by collecting dividends. 

That’s absolutely fine, but it means that it’s important that I’m prepared to stay invested for the long term in the companies I choose. So my second rule is to be patient when buying dividend stocks.

Stick to the basics

Buying dividend stocks is a lot like buying any other type of stock, in my view. It’s important to stick to businesses that I can understand and have a positive view of for the long term. 

My third rule when buying dividend stocks is therefore to stick to what I know. A good example of this is Starbucks. I can understand the company’s product, the advantage it has over its competitors, and how it might continue into the future.

Don’t overpay

As with any investment, it’s possible to pay too much for shares in a business. My fourth rule for buying dividend stocks is to avoid overpaying.

Importantly, a stock isn’t cheap just because it used to be more expensive. The Unilever share price has declined by around 13% since the start of the year, but even at these levels, it hasn’t yet reached a price that I think represents a good investment opportunity.

Focus on the long term

Relatedly, my final rule is to make sure that I’m evaluating the prospects of a business for the long term. At the moment, shares in Howden Joinery Group are down 27% since the beginning of the year as inflation and fears of recession are prominent.

However, I believe that over the next 10, 20, or 30 years, the business will do well. As a result, I think that Howden Joinery Group might make a good dividend stock investment for me at the moment.

Summary

When I’m investing in dividend stocks, I like to try – as much as possible – to think about them the way that I think about my other investments. That means being attentive to the underlying business, avoiding overpaying for stocks, and being patient as I wait for my investment plans to materialise.