Are you holding off investing because you think the stock market is too high? Have you overpaid for stocks in the past and are worried about paying too much again? These are questions I ask myself almost every day. Like many other investors, I have been really burned in the past from overpaying for stocks.
A few years ago I decided to take a new approach to investing in the stock market. Instead of trying to time the market, I developed a strategy to invest in only the top dividend growth companies. While not as exciting as investing in the next high growth technology company, a dividend stock portfolio can offer long term growth and a steady income stream.
Even when the overall market is perceived as being too high, there are still opportunities to invest in dividend paying stocks.
Here are 7 tips that can help create a dividend stock investing strategy and feel safe you will not lose money in the stock market over the long run.
1 – Save on Brokerage Fees
If you are worried about overpaying for stocks in a bull market, look to low cost brokerages to purchase shares of stock. For example, I have been using my LOYAL3 account for several months now to buy a few dividend stocks. All stock purchases made through LOYAL3 are commission free, which makes it easier for me to invest when there is uncertainty in the market.
Another option is to look into company sponsored direct stock purchase plans (DSPP) to save on commissions. There are several companies that will waive the fees to purchase stocks through a DSPP.
2 – Dollar Cost Averaging
While I certainly don’t want to overpay for my stock purchases, I also want to make sure my investment dollars are working for me as soon as possible. Investing smaller chunks of money on a more frequent basis allows me to dollar cost average into a stock, helping me to pay market value.
This helps me remain calm if a stock price goes down as I know I can continue buying up shares at a lower price.
One downside of dollar cost averaging is the commissions and fees that could add up by making more frequent purchases. If you can find low cost brokers or leverage free ways (i.e. LOYAL3) to purchase stocks, then this can help you avoid overpaying for stocks.
3 – Low Price to Earnings
When you are looking for dividend stocks to buy, concentrate on those with a Price to Earnings (PE) ratio under 20. Become a patient investor and buy the top dividend companies when they are offered at a discount.
It is important to use other criteria to screen stocks (i.e. payout ratio, yield, etc.) but buying companies when they have a lower P/E can certainly help stretch your investment dollars and feel comfortable investing in any type of market.
4 – DRiP
Take advantage of dividend reinvestment plans (DRiP) to save on costs. Most brokerage accounts allow investors to automatically reinvest their income back into partial shares of the stock. They are usually easy to setup and can help investors start earning compounding interest.
Note – One trading platform that currently does not offer DRiP is LOYAL3.
5 – Sustainable Dividend Growth
Look for companies with sustainable dividend growth. The dividend payout ratio is a criterion that can be used to make sure you are buying a company that can sustain future dividends. The ratio represents the amount of a company’s earnings that are being used to pay the dividend. Avoid buying companies with a payout ratio that is greater than 60 to 70 percent.
6 – Focus on Past Dividend Growth
Focusing on past dividend growth of a company is another way to put your concerns about investing at ease. For example, a stock with a solid 5 and 10 year dividend growth rate (6% or more) is a good sign of a well-managed company. The Dividend Aristocrats are an annual list of top performing dividend stocks that have consistently increased dividends over the years.
While past dividend growth is no guarantee for the future, it is still a good indicator of increases in the years to come.
7 – Avoid High Dividend Yields
While they can be very tempting, a high dividend yield (over 5% or 6%) is usually not a good sign. Chances are the company will not be able to sustain a dividend that high over a long period of time.
There are exceptions to this rule, but don’t get caught up in chasing high yielding stocks. Focus on the boring ones that consistently pay 2.5% to 5.5% that have a long history of consecutive increases.
No matter what the overall stock market is doing, there are always opportunities to invest in top dividend companies. Even when the market is high, there are plenty of ways to limit your risks of over paying for stocks.
One tool used by dividend investors is to use a set of criteria to buy only the best companies. Screening out stocks based on P/E ratios, payout ratios, and dividend growth rates is one way to find top dividend stocks to invest in.
Another way to feel better about investing when the overall market is high is to try and save on commissions and fees. For example, investors can take advantage of the LOYAL3 trading platform where they can invest as little as $10 while paying no commissions or fees. Investors can also take advantage of direct stock purchase plans to save on commissions. I know that I feel more comfortable buying stocks when I am not paying any fees or commissions.
Finally, investors can leverage dollar cost averaging and dividend reinvestment plans to lower their overall price per share they pay for a dividend stock.
What other tips can you provide that makes it easier to invest in a bull market?