Dividend Investing

Dividend investing is an easy way to earn passive income. A $10,000 investment in a stock with a 5% dividend yield will provide you with $500 in yearly dividend income – all without you doing anything! So this is like an easy way to FIRE, which also stands for Financial Independence Retirement Early.

In fact, the best dividend stocks can boost your total returns over time through a combination of dividend payouts and stock price appreciation. Think of, an enhanced compounding effect!

But not all dividend stocks are a good investment. For example, a stock with a very high dividend yield might turn out to be a dividend trap.

Criteria for Choosing Dividend Stocks

So now, there are 5 indicators that helps us identify a good dividend stock

High Dividend Yield = Better?

While it can be tempting to pick stocks with the highest dividend yield, a high dividend yield can sometimes be misleading. Dividend yield is calculated by dividing a company’s annual dividend by its share price on a certain date. For instance, if the annual dividend is $3 and the stock price is $100, the dividend yield is 3%.

But what if the same stock falls to $60, perhaps due to company mismanagement? The dividend yield now becomes 5%, although the annual dividend itself remains unchanged. This scenario is often called a dividend yield trap.

A stock with a high dividend yield is attractive, but that’s not the only metric to focus on. You should also evaluate if the company can sustain and grow its dividend payouts over time.