Guest Contribution By Chris Douthit, Option Strategies Insider
Dividend stocks often lack the glitz and glamour that high flying names like Tesla (TSLA), Nvidia (NVDA), or other tech stocks bring to the table…
However, what dividend stocks offer is an investment that continues to chug along while paying steady income simultaneously. Plus, when combining dividend stocks with options, these investments can return 30% or more per year.
Growth stocks usually get all the headlines, but most people don’t realize that dividend stocks are one of the most potent wealth-building products investors have at their disposal.
A 2015 study performed by Factset looked at return data from 1991 to 2015, and showed that dividend stocks paid out an average annual return of 9.7%, while non-dividend stocks earned only 4.18% annually. Dividend stocks more than doubled the output of non-dividend stocks over the 24-year study.
It can be pretty challenging to say no to a product delivering superior returns, especially when they do it with less risk. Because dividend stocks are considered safer investments, they deliver these returns with less implied volatility, which means they are more resistant to substantial price drops during downward pressure.
When we can compare dividend stock contribution to overall wealth, the numbers become quite clear.
Some people may be shocked when they see the numbers. This is because those high-flying growth stocks are the companies picking up all the media headlines. They don’t see all the non-dividend paying stocks that end up failing to make money and then go out of business. So, for every growth company that ends up making it big, there could be five growth companies that go belly up.
Companies that pay dividends usually have proven themselves over time, already generating enough revenue that they can now distribute that revenue to their shareholders. Unfortunately, many growth stocks never get to this point.
Now before you go out and start buying a bunch of different dividend stocks, we want to make it clear that not all dividend stocks are made the same. Some dividend payers will massively outperform others, and when you find these high-quality names and mix them with options, you can make significantly higher returns.
How Do You Find the Best Dividend Stocks?
People select stocks for different reasons; there is no best strategy for selecting stocks. However, you need to implement some strategy…and going by your gut is not a strategy.
With that said, here is a strategy that often works well for us:
Select quality stocks: Pretty straightforward, look for companies with a proven track record for success, such as the Dividend Aristocrats, a group of 65 stocks in the S&P 500 Index with 25+ consecutive years of dividend increases. Of course, past performance is no guarantee of future performance, but it’s an excellent place to start.
Look for a good dividend: A small dividend will not do much good, so make sure that the company pays a decent dividend.
Not too large of a dividend: A high dividend yield is great, but if the dividend is too large, the company is paying out all its profits in dividends and has nothing left to grow the company. Here you need to calculate the company’s payout ratio and understand an acceptable payout ratio for various industries.
A growing company: Look for a company that continues to grow its revenue and earnings over time. Even though we don’t expect huge growth, we want at least some growth. Just make sure you’re not investing in a once successful company that now is falling on struggling times.
Growing their dividend: The only thing better than getting a dividend is getting a larger dividend over time. Look for companies that have a track record of raising their dividend payments. This is nice for your pocketbook and shows the company believes it will continue to grow.
Some volatility: Dividend stocks are undoubtedly low volatility investments, but some have a little more volatility than others, especially around earnings reports or other types of announcements. This allows us to use a covered call options strategy to add additional income. This allows you to make money in three ways:
- Receive profit from the stock appreciating in value
- Receive profit from the quarterly dividend payment
- Receive profit from selling calls against the stock
Most dividend investors don’t take the final step of selling call options against their stock, but for those who do, the returns can be substantially higher. And since the stock entirely covers the sale of the call, there is no additional risk.
Dividend stocks are an excellent investment for all types of investors. It’s a safe investment that continues to outperform year after year and decade after decade. Returns can be even more significant when you combine the right dividend stock with a covered call option strategy.
Dividend stock strategies may not seem as sexy as fast-moving growth stocks, but over the long haul, the returns are steady and add up substantially over time. To learn more about combining dividend strategies with option strategies, get the free course at OptionStrategiesInsider.com.