40 things every dividend investor should know about dividend investing

8/10/2019 40 Things Every Dividend Investor Should Know About Dividend Investing

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40 Things Every Dividend Investor Should Know About Dividend

Investing

Dividend investing is a great way for investors to see a steady stream of returns on theirinvestments. Though the world of dividend investing can seem conservative and basic on thesurface, there is a lot to know in the dividend world that can help investors create long termwealth.

Here are 40 things every dividend investor should know about dividend investing:

1. Dividends = Meaningful Portion of Stock Returns.

Going back over the past 80 years, dividends have accounted for more than 40% of the totalreturns of the S&P 500. It is important to note, though, that that has not been a steady orconsistent ratiocapital gains tend to be considerably larger percentages during bull markets,while dividends make up much larger portions in weaker markets.

Consider the image below for a visual representation of just how much dividends have impactedthe S&P 500s returns over time:


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There are really no hard and fast rules (in the United States, at least), regarding when a companycan pay dividends. Tradition (and expectation) still carries a great deal of weight, though, and ithas become the established norm for most regular corporations to pay dividends on a quarterlybasis. Many well-known dividend-paying companies like Coca-Cola (KO) and Johnson &Johnson (JNJ) pay dividends on a quarterly basis.

What is commonplace in the United States is not necessarily so elsewhere. In many countries,dividends are declared and paid once or twice a year. Chinese oil and gas giant Petrochina(PTR) and British spirits giant Diageo (DEO) pay twice a year, while Novartis (NVS) andSiemens (SI) each pay annual dividends.

Although it is the norm in North America for companies to pay dividends quarterly, somecompanies do pay monthly. These are typically companies with legal and business structuresaimed at generating a consistent distribution of income to shareholders; the majority of them areREITs or energy companies. Likewise, many ETFs (particularly those that invest heavily inincome-generating assets like bonds) pay dividends on a monthly basis.

See our complete list ofMonthly Dividend Stocks

4. ADR Yields Can Be Confusing and Inconsistent

American Depository Receipts (or ADRs) offer investors a chance to invest in foreigncompanies. While these are basically simple instruments that trade like any other stock, they canbe a little confusing and inconsistent when it comes to dividends and the reported yields onfinancial information sites.

Be sure to see our complete list ofForeign Dividend Stocks.

Some of the trouble comes from how these sites calculate yields. Some sites will take the mostrecently-paid dividend and multiply it by the number of times the company pays a dividend in ayear (typically one or two for most foreign companies). Other sites will simply use the totaldividends paid over the past twelve months. Likewise, many sites tend to be slow or inconsistentin incorporating announced changes to, or declarations of, dividends.

Currency can also have a meaningful impact on ADR yields. ADR dividends are typicallydeclared in the operating currency for the company, but paid to the ADR holders in dollars. Howand when a financial site applies the exchange rate to this conversion can have a meaningfulimpact on the reported yield.

It is also important to note that the reported yield of an ADR is not necessarily what an investorwill receive. Many countries require that companies paying dividends to foreign shareholderswithhold taxes, reducing the dividend. ADR custodians are also allowed to deduct custody fees(basically, the expenses they charge for managing and maintaining the ADR) from the dividend,further reducing the yield. Both foreign withheld taxes and custody fees are typically deductiblefor individual tax purposes (at least when held in taxable accounts).
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5. Dividends Are Not Capital Gains or Income

Dividend income is unusual in that it has typically already been taxed (corporations pay taxes onthe income that they then use to pay dividends), but that does not shield it from additionaltaxation. Prior to the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the Bush tax

cuts), stock dividends were generally taxed at the same rate as an investors ordinary income.

Ordinary Income Tax Rate Ordinary Dividend Tax Rate Qualified Dividend Tax R

10% 10% 0%

15% 15% 0%

25% 25% 15%

28% 28% 15%

33% 33% 15%

35% 35% 15%

39.60% 39.60% 20%

Learn more aboutQualified Dividend Tax Rates.

With these tax cuts, a new category of qualified dividends was created, and those that qualified(which would include most regular corporate dividend payments) were taxed at a new, lowerrate. From 2003 to 2007, qualified dividends were taxed at either 15% or 5% (if the individualstax bracket was 10% or 15%). From 2008 to 2012, the tax rates for qualified dividends were 15%or 0% (again for investors in the 10% or 15% brackets).

6. Payout Ratios Above 100% Are a Red Flag

Dividends are supposed to be a mechanism by which companies share their financial successwith the shareholders. While dividends do not, strictly speaking, have to come from earnings it isnot sustainable for a company to pay out more than it earns.

Accordingly, it is important for investors to monitor a companys payout ratio. The payout ratiois simply the ratio of dividends in a specified period (typically the last twelve months) divided bythe companys reported earnings over the same period. For simplicitys sake, most dividendpayout ratios use the per-share dividend as the numerator and the earnings per share (EPS) as thedenominator.

If a company has $1 per share in earnings and pays a $0.70 per share dividend, the payout ratio is

70%. Likewise, if the dividend were $0.10 the payout ratio would be 10%.

If the same company paid a dividend of $1.20 per share, the payout ratio would be 120% andinvestors would do well to ask how that company could hope to continue a dividend in excess ofits earnings. Companies do try to maintain consistent (or rising) dividends, even in industrieswhere year-to-year financial performance can vary. Consequently, not all companies with adividend payout ratio above 100% are paying an unsustainable dividend, but no company canindefinitely pay out more in dividends than it earns.
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You can see the payout ratio of a company right next to where the annual payout is listed on allDividend.com ticker pages; take for example AT&T (T).

It is also worth noting, though, that earnings (and earnings per share) are a byproduct ofaccounting and not strictly real. Companies actually pay dividends out of the cash flow theygenerate, though it is not common to see payout ratios calculated on the basis of operating or freecash flow.

Learn everything you need to know about the payout ratio inThe Truth About Dividend PayoutRatio.

7. Effective Yield Is Based on Your Adjusted Cost Basis

One of the underappreciated ways to evaluate dividends is in the context of the investors ownhistorical cost basis in the stock. Effective yield is a concept with multiple definitions ininvesting, but one definition includes evaluating dividend yield on the basis of an investors own

cost basis. This analysis helps to cover the deficiency of information offered bycurrent yield.

Consider the followinga stock currently trades at $50 and pays a $2 dividend, meaning that thestock has a current yield of 4%. But if an investor bought that stock years before (and the stockprice has increased since then), its not an accurate reflection of the yieldon the investment. Ifthe investor bought the stock at $35, the current yield on that cost basis (what were calling theeffective yield here), is actually 5.7% ($2 divided by $35).

8. Current Yield Is Based on Different Calculations

Current yield is a relatively common concept in dividend investing. The current yield is simplythe dividends paid per share divided by the price per share. If a company pays a $1 per sharedividend and the stock price is $100, the current yield is 1%.

Yet not all sources calculate and report current yield the same way. While most sites report yieldon the basis of four times the most recently paid or declared dividend, some pay on the basis ofthe dividends paid over the past 12 months.
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Consider the following to see the differenceif the company in the prior example announcedthat it was increasing its dividend by 15% (to $1.15 per share), some sites would report the yieldas 1.2% (1.115% rounded up), while some would continue to report 1% until the first payment atthe higher rate, at which point the yield would move up to 1.04% (three quarters of the old$0.25/qtr dividend + one quarter of the new $0.2875 dividend).

If youre looking for lucrative income investing opportunities, be sure to check out our listofHigh Yield Stocks.

9. Cumulative Dividends: Declared, Not Yet Paid

In some cases, corporations issue preferred stock that carries a right whereby any unpaidpreferred dividends accumulate and must be fully paid before certain other payments (likecommon stock dividends) can be made. Unpaid dividends accumulate and this type of preferredstock is called cumulative preferred.

This is not to be confused with a stock that is trading cum-dividend, which refers to a stockwhere a dividend has been declared and current buyers are entitled to that dividend (cum-dividend means with dividend). Stocks cease to trade cum-dividend on their ex-dividend date,which is listed on Dividend.com ticker pages (see table above).

10. Dividend Aristocrats: Exclusive ClubInvestors will find many websites that try to use catchy titles to draw attention to particularlyattractive dividend-paying stocks. One title worth looking out for is dividend aristocrat.Standard & Poors (S&P) defines a dividend aristocrat as a company that has increased itsdividend for 25 straight years, excluding special dividends.

Be sure to see our complete list of25-Year Dividend Increasing Stocks.

11. Value Stocks with Dividend Discount Models (DDM)

Dividend discount models work on the theory that the only real value to a shareholder is thedividend stream that a company produces (academic theory holds that capital gains andvariability in share prices are unpredictable and simply the byproduct of investors adjusting theirexpectations for a companys future stream of dividends). Consequently, a dividend discountmodel attempts to project these dividends and discount them to a net present value per share thatrepresents a fair value for the shares.
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Arguably the most accurate way to run such a model is to project a companys dividends for asmany years as possible, calculate a terminal growth rate, and then discount that back by theappropriate discount rate. That discount rate should be the cost of the companys equity, whetherdetermined through the Capital Asset Pricing Model (CAPM) or some other method.

Some investors try to use a more simplified version of the model, like the one listed below:

Stock Value= D1/ RG

This version has the investor use next years anticipated dividend (D1), divided by the cost ofequity minus the estimated perpetual growth rate of the dividend (G). As an example, if acompany is projected to pay $1 per share in dividends next year, the growth rate is projected tobe 5%, and the cost of equity is estimated to be 8%, then the fair value for the stock is $33.33.

Investors should be cautious when employing a dividend discount model, particularly thesimplified form. The model assumes that a firms cost of equity never changes, that the dividend

growth rate never changes, and that the dividend growth rate is less than the cost of the firmsequity.

Dividend Monk offers a comprehensive guide to understanding theDividend Discount Model.

Whats more, while the model is quite simple and requires very few inputs, the end result is verysensitive to the inputsa small difference in the estimated growth rate or discount rate can resultin large differences in the implied value of the equity (in the above example, changing thegrowth rate estimate by only 5% (to 5.25%) changes the fair value by 9% (to $36.36).

12. The Power of Re-Investing Dividends

Reinvesting dividends, particularly those paid by companies with a history of increasing theirdividend over time, can be a powerful avenue to increasing total wealth over time. Althoughinvestors have to pay taxes on reinvested dividends in taxable accounts, that money neverthelessstays active in the stock and accumulates value.

The following table illustrates the power of reinvested dividends using theDividendReinvestment Calculator.In the example below, lets assume you purchase 100 shares of a stocktrading at $100 per share ($10,000 total investment) and plan to hold it for the next 25 years. Atthe time of purchase, the security pays a $5 dividend annually, or 5% yield, and its share priceand dividend are both expected to grow at a rate of 5% annually.
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After 25 years, your $10,000 initial investment would have grown to nearly $59,000 without anyreinvestment; by comparison, that same amount could have grown to nearly $115,000 had youregularly reinvested your dividends.

13. Basics of DRIPs (Dividend Reinvestment Plans)

Dividend Reinvestment Plansare investment plans offered directly by dividend-payingcompanies. When a shareholder enrolls in a DRIP, they no longer receive a companys quarterlydividends as cash, but rather the amount is used to directly purchase more shares from thecompany.

Although the investor is still obligated to pay taxes on the dividend amounts, the investor forgoes

brokerage commissions to buy those shares and can buy fractional shares. In some cases, but notall, the sponsoring company may give a discount to the share price on these purchases. In manycases, an investor may choose to receive a certain percentage or amount of the dividend in cash,while having the remainder reinvested in shares.

There may be some downsides to certain reinvestment plans however, so be sure to read ourguideEverything Investors Need to Know About DRIPs.

14. Dividend Capture Strategies

Although investing in dividend-paying stocks and collecting those quarterly payments isconsidered consummately conservative equity investing, there are much more aggressive ways toplay dividend-paying stocks, including dividend capture strategies.

In essence, dividend capture strategies aim to profit from the fact that stocks do not always tradein strictly logical or formulaic ways around the dividend dates. For instance, while a stock ismarked down before trading begins on the ex-dividend date by the amount of the dividend, thestock does not necessarily maintain that adjustment when actual trading begins (or ends) that
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day. Likewise, the desire to reap the benefit of the upcoming dividend often spurs interest in thestock ahead of the ex-dividend date, leading to short periods of out-performance.

In its simplest form, dividend capture can involve tracking those stocks that, for whatever reason,do not generally trade down by the expected amount on the ex-dividend date. Investors may

notice that although a given company pays a $1 dividend, the stock only declines by an averageof $0.50 on the ex-dividend date. That being the case, an investor can buy the stock on the dayprior to ex-dividend (say, for $100), sell it on the ex-dividend date (say for $99.50), and thecollect the $1 dividend a few weeks laterleading to a total return of $0.50 per share on thetrade (losing $0.50 on the stock, but gaining the $1 dividend).

Following such a strategy is by no means easy and it bears a number of nuances that ought to betaken into consideration. For anyone looking to take advantage of this approach, be sure to firstread ourDividend Capture Strategy Guidefor a more thorough understanding of the risksinvolved.

15. Companies Cant Fake Dividends

Some investors prefer dividend-paying stocks because dividends are real and trackable. Acompanys reported net income or earnings per share (EPS) is largely a product of accounting,and may have little or nothing to do with a companys actual financial health. As a result,

devious executives and skilled accountants can make even a terrible company look healthythrough the lens of earnings and reported income.

Dividends are different. Dividends either appear in shareholders accounts or they dont and ifthey dont, there are no accounting tricks that explain it. Dividends dont necessarily have to bepaid out of income, but paying dividends creates a paper trail of cash that is much harder tomanipulate.
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This is not to say that a companys dividends are an accurate representation of a companysfinancial health or liquidity. Companies can, and have, paid dividends with borrowed money orsources of funds other than operating cash flow. Learn more aboutThe Biggest Dividend StockDisasters of all Time.

16. Theres No Free Lunch

Dividends are basically a mechanism for companies to share their financial success with long-term shareholders, and short-term investors cannot simply buy and sell around dividend dates toreap risk-free profit. On the ex-dividend date (the date on and after which new buyers will not beentitled to the dividend), the price of the stock is marked down by the amount of the declareddividend. While shares do not always fully maintain this adjusted value (see our section onDividend Capture above), trading shares around dividend dates is not a simple alpha-generating strategy.

While it may be true that theres no free lunch on Wall Street, there are still more than a

handfulways investors can make (and keep) more moneyover the long-haul.

17. Dividends May Foreshadow Lower Growth

Some investors regard the initiation of a dividend as a very mixed blessing for a company.Generally speaking, companies should retain earnings when management can reinvest thatcapital into projects that are expected to generate a return in excess of the firms cost of capital.If a company cannot identify enough projects that meet that minimum return, though, theshareholder-friendly move to make is to return that capital to shareholders in the form ofdividends (and/or share buybacks).

When companies begin a dividend, and particularly when the company is a tech company likeMicrosoft (MSFT), Cisco (CSCO) or Apple (AAPL), some investors regard this as proof thatthe company can no longer find attractive avenues to growth.

See10 Big-Tech Stocks That Pay a Dividend

Although this analysis contains an element of truth, it is in many cases exaggerated. Spendingretained earnings on R&D does not guarantee future results, and there is not always (or evenoften) a direct relationship between the money invested in new a project and its future returns.Take the case of the Apple iPhoneApple reportedly spent about $150 million over 30 months

to develop the iPhone, a product that has generated billions in profits.

It does not automatically follow, then, that the next project is going to require billions of dollarsto develop, or that investing billions into development will somehow guarantee a multibilliondollar product. Consequently, many innovative companies find that they simply generate morecash than they can effectively redeploy in their business. That makes returning that cash toshareholders more desirable than wasting it on inefficient or unfocused R&D or ill-considered(and over-priced) acquisitions.
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It is typically true that a companys fastest growth days are behind by the time it initiates adividend. As many dividend-paying companies like Abbott Labs (ABT), McDonalds (MCD),and IBM (IBM) have amply proven, though, the initiation of a dividend does not precludefurther growth for a company.

18. Dividends Can Protect from Inflation

Owning dividend-paying stocks, particularly those that increase the dividend regularly, can be abetter hedge against inflation than bonds. The problem with bonds (excluding floating-ratebonds) is that they pay fixed income streams over the life of the bondthe dividend payments inYear 20 are the same as Year 1. In periods of inflation, that means each successive interestpayment is worth less in terms of purchasing power, and it also means that the purchasing powerof the principal amount of the bond (which may not mature in 10, 20, or 30 years) could erodesubstantially as well.

Learn more aboutHow Dividend Stocks Can Protect Against Inflation.

Consider the chart below which illustrates how your annual dividend income from a $100,000investment would have changed over time from 1980 through 2013, comparing what you wouldhave earned had you invested in the S&P 500 Index versus the Barclays U.S. Aggregate BondIndex:
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The dividend income earned from the S&P 500 investment would have grown from $5,234 to awhopping $32,416 over time, compared to that of the bond investment which has seen a steadydecline in annual income.

With a dividend-paying stock, investors do not lose to inflation if the dividend grows as fast as

(or faster than) the inflation rate. According to data collected byRobert Schillerat YaleUniversity, dividends from the S&P 500 have grown at an annual rate of 4.2% since 1912, whilethe consumer price index (the most commonly accepted proxy for inflation) has risen by 3.3%.

19. Non-Cash Dividends

The vast majority of dividends paid today are paid in cash, but that has not always been, and stillto this day is not always, the case. Dividends can be paid out in virtually anything of value, andcompanies have paid dividends in their own stock, other companies stock and with physicalgoods.

Although its uncommon now, many companies used to pay regular stock dividends wherebyshareholders would get a certain number of shares for every share they already owned (typicallya small fraction like one share for every 20). The reason pay is in quotation marks is that stockdividends really arent dividends in the traditional sense they are stock splits and the shareprice adjusts accordingly, meaning that shareholders are financially no better off post-stockdividend.

Some companies have used the dividend mechanism to spin off or divest holdings in other publiccompanies. Many companies treat these asspecial or one-time dividends,not as regularlyquarterly payments to shareholders. In these cases, shareholders receive actual shares of stock (orwarrants or rights) to the other company as the dividend in proportion to their share ownership of

the issuing company.

In some rare cases, companies have also used physical goods as dividendsWrigleys gaveshareholders packs of gum every year, and other companies (particularly in entertainment anddining businesses) would give coupons or vouchers to shareholders. Although these have usuallybeen regarded by the issuing companies as gifts or perks of share ownership, they are technicallydividends.

20. Some Tech Companies Can Pay Attractive Dividends

Tech companiesare not traditionally major dividend payers, but that trend has changed as techcompanies mature and accumulate more cash than they can effectively redeploy in growing thebusiness.

IBM (IBM) has paid a dividend since the late 1960s, while Texas Instruments (TXN) has paidone since the early 1970s. Hewlett-Packard (HPQ) began paying a dividend in the early 1990s,and many of the tech stars of the 1980s and 1990s, including Microsoft (MSFT), Cisco(CSCO), Oracle (ORCL) and Intel (INTC) have initiated dividends over the past decade.
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21. AT&T Is the U.S. Dividend King

Though Apple (AAPL) is by far the largest U.S. stock by market cap, its far from the topdividend payer. That title belongs to AT&T (T), which paid out $9.7 billion in dividends lastyear. That means AT&T pays out about $18,000 in dividends to its shareholders each minute.

See7 Impressive Facts About AT&Ts Dividend.

22. Dividends Can (and Do) Get Cut

Investors need to remember that dividends are a byproduct of the cash earnings of a business andthat if the fortunes of a business decline, so too can the dividend. Companies as varied asGeneral Motors, Kodak, and Woolworth all once paid robust dividends, until their fortuneschanged severely (all three companies went bankrupt, and Woolworth disappeared from thebusiness landscape years ago).

It doesnt even take total devastation to hurt a dividend. Virtually every U.S. bank that

participated in the Troubled Asset Relief Program (TARP), and almost all U.S. banks were partof the program, was required to cut its dividend.

Many reliable dividend-paying banks like U.S. Bancorp (USB) cut their dividends, and in somecases cut them dramatically; consider the chart below and take note of the steep drop in thedistribution seen after the 2008 financial crisis.
http://www.dividend.com/dividend-stocks/technology/personal-computers/aapl-apple-inc/http://www.dividend.com/dividend-stocks/technology/personal-computers/aapl-apple-inc/http://www.dividend.com/dividend-stocks/technology/personal-computers/aapl-apple-inc/http://www.dividend.com/dividend-stocks/technology/telecom-services-domestic/t-atandt/http://www.dividend.com/dividend-stocks/technology/telecom-services-domestic/t-atandt/http://www.dividend.com/dividend-stocks/technology/telecom-services-domestic/t-atandt/http://www.dividend.com/how-to-invest/7-impressive-facts-about-atts-dividend/http://www.dividend.com/how-to-invest/7-impressive-facts-about-atts-dividend/http://www.dividend.com/how-to-invest/7-impressive-facts-about-atts-dividend/http://www.dividend.com/dividend-stocks/financial/regional-midwest-banks/usb-us-bancorp/http://www.dividend.com/dividend-stocks/financial/regional-midwest-banks/usb-us-bancorp/http://www.dividend.com/dividend-stocks/financial/regional-midwest-banks/usb-us-bancorp/http://www.dividend.com/dividend-stocks/financial/regional-midwest-banks/usb-us-bancorp/http://www.dividend.com/how-to-invest/7-impressive-facts-about-atts-dividend/http://www.dividend.com/dividend-stocks/technology/telecom-services-domestic/t-atandt/http://www.dividend.com/dividend-stocks/technology/personal-computers/aapl-apple-inc/


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23. Not All Dividend Payers Are Stocks

While dividend-paying stocks capture most of the attention of equity investors looking for

investment income, they are not the only game in town. Many other financial instruments thattrade like stocks offer investment income to their owners.

Exchange traded fundsand exchange traded notes (ETNs) are often designed to replicate a stockmarket index, and many of these stocks pay dividends. Likewise, many ETFs and ETNs invest inincome-generating securities like bonds. Consequently, many of these ETFs and ETNs pass onthese dividends to shareholders.

Master limited partnershipsare businesses organized under special rules that allow them to avoidcorporate taxation and pass on a substantial portion of their income to owners. MLPs are nottechnically corporations, they do not issue shares (a share of an MLP is typically called a unit),

and they do not pay dividends (they pay distributions), but in many respects owningan MLP issimilar to owning a dividend-paying stock. Investors should note that the tax treatment of MLPdistributions is different than that for common stock dividends.

Real estate investment trustsare special types of businesses organized in a way to pass onsubstantial corporate earnings to unit holders. As the name suggests, these businesses have to beengaged in real estate operations in some way (owning/operating buildings or land,
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owning/trading mortgage bonds, etc.), and their earnings are free of corporate taxes so long as alegally-mandated minimum percentage of earnings are distributed to shareholders.

24. Dividend Tax Rates Have Varied Historically

Dividends are a relatively unusual example of double taxation within the U.S. tax system. Acorporation generally pays dividends out of incomeincome that is taxed by the U.S.government. Those dividends are then once again subject to taxation is held in a taxablebrokerage account.

It has been the case over history, then, that dividend tax rates have varied and not always in lock-step with ordinary income tax rates or capital gains tax rates. See table below for reference:

Time Period Tax Rate on Dividends

1913-1936 Exempt

1936-1939 Individuals income tax rate (Max 79%)

1939-1953 Exempt

1954-1985 Individuals income tax rate (Max 90%)

1985-2003 Individuals income tax rate (Max 28-50%)

2003-Present 15%

Read more aboutThe History of Dividend Tax Rates.

25. MLPs Can Offer Attractive Dividends

Master Limited Partnerships (MLPs) are a special type of limited partnership (a way of

organizing/creating a business) that can trade on public stock exchanges. MLPs must generatethe bulk (90%+) of their income from what the IRS deems to be qualifying sources, whichtypically means activities related to the production, processing, transportation and distribution ofenergy (oil, natural gas, various distillates, coal, etc.). As partnerships, MLPs do not pay incometax and can pass on pro-rated shares of their depreciation to unit holders.

The tax treatment of MLP distributions can be quite complex and will vary from investor toinvestor. To better understand some of these nuances, consider our guideEverything DividendInvestors Need to Know About MLPs.

26. Certain Sectors Are Known for Stable Dividends

Within the dividend investing world, certain sectors have earned a reputation as reliabledividend-payers. In particular, utilities and telecoms are famous go-to sectors for dividend-paying companies. Prior to the housing market crash in the United States and the resultrecession, banks too were often seen as reliable dividend payers.
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Sectors known for being reliable dividend-payers tend to share certain characteristics; to learnmore about these, read our guide toDividend-Friendly Industries.

27. Tech Companies Are Starting to Boost Dividends

Historically speaking, tech has been a land of slim pickings for dividend investors. As techcompanies founded in the 1970s and 1980s have matured, though, suddenly investors have amuch more promising array of dividend-paying investment opportunities in the tech world.

Dividend-paying tech stocks may also offer more growth potential than dividend investors arecommonly used to seeing. While it is true that many investors regard the initiation of a dividendas a sign that a companys best growth days are behind it (particularly in tech), that does notmean that a company will never grow again. This could be particularly true in the case oftechnology, where new product development does not typically require a proportionatereinvestment of capital (it typically takes less than $1 of reinvested capital in technology togenerate an incremental dollar of capital).

Consider the image below which showcases thegrowth in dividendspaid by every sector since2004:

Tech companies can, and in many cases do, offer above-average dividend growth potential.Companies typically initiate dividends at low levels relative to their payout capability, giving theleeway these companies have to raise the payout ratio in the future. Whats more, if techcompanies can continue to grow faster than the market, it increases the probability of above-average dividend increases.

28. Dont Be Fooled by Capital Gains Distributions
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Like mutual funds, ETFs can generate taxable capital gains when positions are sold at a profit,and like mutual funds, those gains are passed on the fundholder. While most ETFs are highlytax-efficient and run themselves in such a way as to minimize capital gains distributions, it isnevertheless true that ETFs will periodically distribute these taxable capital gains toshareholders.

Learn more aboutWhen an ETF Distribution Isnt a Dividend.

These distributions may look like dividends (and can generally be reinvested) and some financialnews sites may erroneously include them in reported yields, but they are not dividendsthey arecapital gains and taxed at an investors capital gains rate.

29. The Basics of One-Time Distributions

While most U.S. companies that pay dividends strive to do so on a consistent schedule, somecompanies do pay special one-time dividends. These payments can serve many purposes; in

some cases, it is a way for a company to share the proceeds of a major asset sale. In other cases,it may be part of a recapitalization of the business or a way of disgorging accumulated cashwithout effectively obligating the company to a higher ongoing dividend payout.

For example, consider the special dividend paid out by Progressive Corp (PGR) over the years:
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To learn more about this topic, see8 Examples of Special Dividends.

In some cases, companies can categorize these special one-time payouts as a return of capital.In doing so, the distributions become tax-free to the recipients.

30. Companies Can Issue Stock Dividends

Not all dividends have to be paid in cash. Companies can pay dividends with additional shares ofstock (stock dividends). When companies do this, they are effectively splitting the stock andthestocks price adjustsaccordingly.

31. Theres a Long History of Dividends
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The concept of dividends goes back so far that the question of the first company to pay adividend is very much an open question. A French joint stock company, Socit des Moulins duBazacle, may well have been the first (the company was formed in 1250), and other companiesformed in the 16th century and early 17th century like Muscovy Company and East IndiaCompany paid dividends to their shareholders.

The Hudson Bay Company was the first North American commercial corporation, and mostlikely the first to have paid a dividend. That first dividend (paid 14 years after the companysformation in 1670) was a whopper too50% of the par value of the stock.

Looking forhistorical dividend stock data? Use our ticker pages to download importantdistribution data to aid your analysis.

32. There Are Many Dividend-Paying Stocks at Home

As of the end of September, 2014, there were reportedly 2,940 stocks that paid a dividend

trading on U.S. exchanges. Additionally, the number of dividend-paying members of the S&P500 Index stands at over 400, which is the highest level since 1999.

Dividend.com is a great resource to keep track of the definitive information for the vast amountof dividend paying equities; theStock Screener toolmakes it easier to find the security that maybe right for you.

33. Buffett says Always Reinvest Dividends!

Famed investor Warren Buffett has come out in the past in favor of reinvesting dividends.Investors should note, though, that Buffett generally does not follow his own advice in thisregard. While Buffett will add to his stock positions from time to time, he does not reinvest his
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dividends as a matter of course; Berkshire Hathaway (BRK-B)has owned the same number ofCoca-Cola (KO) shares for more than 15 years.

Be sure to see ourUnofficial History of Warren Buffettfor more insights on his personal life aswell as his success in the investing world.

34. Dividend Increases: Leading Indicator

Analysts and investors often regard announced dividend increases as positive predictors of futurecorporate performance. One of the biggest reasons behind this is a seemingly unspokenagreement that dividends are supposed to go up or remain steady, but not decline; companies thatannounce lower dividends are typically perceived as weak/vulnerable, and investors often shunor sell off the stock.

Be sure to see our analysis onS&P 500 Companies that Can Afford to Start Paying a Dividend.

Consequently, corporate boards are typically hesitant to establish dividends that they are notconfident they can maintain; if a company announces a higher dividend, it often signals to themarket that management believes operating conditions have improved and are likely to stay at ahigher level for the future.

35. Volatility of Dividend-Paying S&P 500 Stocks vs. Non-Dividend-Paying Stocks.

An analysis by Ned Davis Research showed that, through December of 2013, the standarddeviation of returns for dividend-paying members of the S&P 500 was 16.90%, while the

standard deviation for non-dividend-paying members was 25.33%.
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The data also reveals that dividend-paying stocks tend to perform better during bull markets aswell as bear markets compared to their non-dividend-paying counterparts.

36. REITs Can Deliver Big Distributions (and Big Risk)

Real estate investment trusts (REITs) can be some of the largest dividend-payers in the stockmarket, due largely to the preferential tax treatment a company receives if it elects to organize asa REIT. Provided that a REIT distributes a certain percentage of its taxable income (presently90%) to shareholders, the companys income is not taxed by the government.

While at least 75% of assets must be invested in real estate and 75% of gross revenue must comefrom rents or mortgage interest, there is some flexibility here, and investors can find companieslike timberland operators organized as REITs.

To learn more about this breed of dividend-payers, be sure to read ourDefinitive Guide toREITs.

Thefavorable tax treatment granted to REITsallows for larger distributions to shareholders, butthese investments can be quite risky. Although real estate has a strong history of performancerelative to inflation, many of the businesses owned/operated by REITs are economicallysensitivewhen the economy weakens, shopping mall traffic declines, office space vacanciesincrease, and so on. Whats more, most REITs rely heavily upon debt financing and thecombination of lower rents/interest income and persistent interest payments during recessionscan put these companies into financial duress.

37. Royalty Trusts Can Be Attractive for Dividend Investors

Like REITs and MLPs, royalty trusts are created with the intention of shielding a businessentitys earnings from taxes and passing the overwhelming majority of those earnings on to theshareholders as dividends (or, more technically, distributions).

The distributions of royalty trusts are usually generated from businesses related to oil/gas ormining. In most cases, a U.S. royalty trust will own a particular asset and lease that asset tooperators who produce the oil or other resource and pay a percentage back to the trust. The trustuses that cash flow to pay its operating expenses and passes the remainder on to shareholders.The existence of the mineral asset typically assures some level of payout, though the dividendcan vary considerably over time as the value of the commodity changes.

38. Good Dividend Stocks Have More Than Just Good Yields
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Dividend UptrendThe DARSDividend Uptrend factor reflects the companys history ofincreasing its dividend, as well as a subjective evaluation as to the likelihood of future payoutincreases.

Earnings GrowthDividends are ultimately dependent upon income and income growth.

Accordingly, DARS tracks a companys a companys projected earnings growth to ascertainand rate its ability and likelihood to continue paying (and/or raising) its dividend.

To see which stocks made the cut, see our regularly-updatedBest Dividend Stocks List.

39. Dividends Once Dominated Investing

It may seem hard to believe, but dividends were once the preeminent consideration for equityinvestors. In fact, prior to the Crash of 1929 and the Great Depression, it was routinely the casethat stocks were expected to yield more than bonds to compensate investors for the additionalrisk that equities carried. While the concept of capital appreciation was understood then,

investing on the basis of expected capital appreciation was considered as something roughlyequivalent to speculative investing and active trading today.

40. Dividends: Antidote to Low Rates

Dividend-paying stocks can also offer investors an antidote to low interest rate environments.Since the Great Recession, interest rates have been stuck at historically low levels, making itvery difficult for risk-averse investors to find attractive yields. Although dividend-paying stocksare not as safe as government bonds, they do offer better after-tax yields.

While interest rates are determined in part by central bank policy, corporate dividend policy ismore independent and corporate dividends can increase even while central banks are cuttingrates, which reduces available yields on bonds.

The Bottom Line

Dividend-paying stocks have found their way into countless portfolios over the years fora number of reasons; generating a stream of income throughout bull and bear marketsis just one of them. If youre considering an investment, be sure to take a good lookunder the hood and uncover any nuances before making an allocation. This guide, as

well as the tools and other educational resources found on Dividend.com, should serveas a great starting point for those looking to beef up their portfolios yield.
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40 things every dividend investor should know about dividend investing

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