5 Stock Market Tips for Dividend Investing

One of the best ways to build wealth is by allocating dividend paying stocks. There are plenty of stocks that pay a dividend, which means there are good stocks and bad stocks that pass along a portion of earnings to shareholders. Just as with any other investment strategy, dividend investing has risks investors must recognize.

It is important for any new or experienced dividend investor to pick up helpful stock market tips whenever possible. The list below highlights a few important concepts for those looking to build a solid portfolio of dividend paying stocks.

Here are 5 stock market tips that dividend investors can use to help build a solid portfolio of investments.

1. Dividend Yield - The dividend yield, also called current yield, of a company represents the annual dividends divided by the current share price. For example, if a company paid $1.00 in dividends and currently trades at $25 per share, the yield would equal 4% ($1.00 / $25). Most dividend investors use the dividend yield to screen potential buying opportunities in the market. One of the most important stock market tips for new investors is to understand the drawbacks of using the dividend yield on its own. The yield of a stock is calculated by using dividends paid over the past year versus the current share price. There is no guarantee that past distributions from a company will continue in the future.
2. Dividend Growth - Another important stock market tip for income investors is to consider the dividend growth of a company over the yield. While the current yield is still an important indicator of the company's dividends, the growth from year to year is more significant. A stock that continues to grow its dividend consistently each year is usually a better long term investment compared to one with a high current yield that cannot sustain the payout. It is important to remember to look at both the current yield as well as the annual dividend growth rate when analyzing income stocks.
3. Payout Ratio - Now that we know dividend growth is an important stock market tip, investors must also consider the payout ratio of the company. The dividend payout ratio represents the percentage of earnings being used to pay the dividend to common shareholders. The bottm line is that dividend growth is important but not at the expense of earnings. A company that has a payout ratio that increases each year should be a concern to potential investors. A general rule of thumb when looking for dividend paying stocks is to pick out companies that can maintain a payout ratio under 50% for the long term.
4. Price-to-Earnings - Every long term dividend investor should be looking at stocks that have value in the marketplace. The price-to-earnings (P/E) ratio is a representation of the current share price in relation to the past 12 months of reported earnings. Any stock that has a P/E value less than 20 is generally considered an undervalued dividend stock. Investors should also factor in the forward P/E which represents the future value of the company based on earnings estimates.
5. Dollar Cost Averaging - Dollar cost averaging (DCA) should play a part in any long term portfolio of stocks. This technique helps investors continually add to their existing positions in order to average out the price paid to own the stock. Using dollar cost averaging removes the need to try and time the market. As long as you are doing your due diligence and selecting the best dividend stocks, it doesn't matter when you purchase them using DCA.

There are plenty of other stock market tips that dividend investors can follow to build solid investment portfolios. The five listed above are good indicators of where investors can start their search for quality dividend stocks. Keep in mind that using only one indicator can give investors misleading results. Using a combination of ratios and indicators makes for much better analysis and helps to limit risks in the market.

What stock market tips can you suggest dividend investors follow when starting out building an income portfolio?