Dividend Investing — The Dollar Dictionary

Ads end in 20 seconds

Loading location...

This content is free thanks to our sponsors

Sponsored Ad – I may earn a commission if you click and buy

Next ad in 5s

You are about to visit an external website.

This is an affiliate link, and we may earn a commission.

Continue?

Investment

Dividend Investing

A strategy of building a portfolio of stocks that pay regular dividends — using the income stream to generate cash flow without selling any shares.

Key metrics in dividend investing: dividend yield (annual dividend ÷ share price — a 3% yield on a £50 stock means £1.50 annual dividend per share), payout ratio (what percentage of earnings is paid as dividends — above 80% can be unsustainable), dividend growth rate (how much the dividend increases each year — more important than current yield for long-term investors), and dividend coverage ratio (earnings per share ÷ dividend per share — higher means more cushion to maintain the dividend in tough times).

The reinvestment strategy is powerful: using dividends to buy more shares (DRIP — Dividend Reinvestment Plan) compounds the portfolio automatically. Each reinvested dividend buys fractionally more shares, which pay slightly more dividends next quarter, which buy slightly more shares — a snowball that builds quietly over decades. The main risk: dividend cuts. Companies facing financial difficulty often cut dividends, which simultaneously reduces income and typically causes a significant share price drop. Due diligence on dividend sustainability is the core skill of serious dividend investors.

Dividend investing is building a portfolio of businesses that send you a cheque every quarter just for being a shareholder. You don't have to sell anything. You don't have to do anything. You own a piece of businesses that generate profits, and those businesses regularly send you a share of those profits as a dividend. The goal is to eventually own enough dividend-paying shares that the quarterly payments cover your living expenses — financial independence without selling a single share.

Real world: Johnson & Johnson has increased its dividend every single year for over 60 consecutive years — earning it the title of "Dividend King." An investor who bought J&J shares in the 1980s at split-adjusted prices of a few dollars per share now receives annual dividends that likely exceed the entire original purchase price — multiple times over. That's the compounding power of dividend growth investing over decades: income that grows every year without requiring any additional capital.

💡 Dividend investing is building a portfolio that pays you — the goal is owning enough income-generating assets that the dividends cover your life, not the sale of the assets themselves.

← Back to The Dollar Dictionary