Ch6. Stock Investing — Dividend Investing & DRIP Strategy
Why Dividend Investing?
Dividends provide cash flow regardless of stock price movements — the bedrock of income-focused investing.
Benefits:
- Regular cash income from portfolio
- Companies that consistently raise dividends typically have strong fundamentals
- Reinvested dividends compound powerfully over decades
- Psychological stability during market downturns
Core Dividend Metrics
Dividend Yield
Yield = Annual Dividend Per Share / Share Price × 100
- 1.5–3%: Growth-oriented payers
- 3–5%: Income-focused; common in mature industries
-
5%: May signal a struggling company cutting dividend ahead
Payout Ratio
Payout Ratio = Annual Dividends / Net Income × 100
- <50%: Sustainable; room to grow
- 60–75%: Monitor carefully
-
85%: Risk of dividend cut (unless stable utility/REIT)
Dividend Growth Rate
Annual percentage increase in dividend payment. A 7–10% annual growth rate doubles the dividend every 7–10 years.
Dividend Aristocrats
Companies in the S&P 500 that have increased their dividend for 25+ consecutive years.
Notable Aristocrats:
| Company | Ticker | Consecutive Years of Increases |
|---|---|---|
| Coca-Cola | KO | 61+ years |
| Johnson & Johnson | JNJ | 61+ years |
| Procter & Gamble | PG | 67+ years |
| Colgate-Palmolive | CL | 60+ years |
Dividend Kings: 50+ consecutive years of increases (even stricter)
The Math of Dividend Reinvestment (DRIP)
Reinvesting dividends into additional shares creates a compounding engine.
Starting investment: $10,000 in a portfolio with 3.5% yield + 7% annual price appreciation + 7% annual dividend growth
| Year | Portfolio Value (DRIP) | Portfolio Value (No DRIP) |
|---|---|---|
| 10 | ~$21,000 | ~$18,500 |
| 20 | ~$46,000 | ~$34,000 |
| 30 | ~$100,000 | ~$63,000 |
The DRIP difference grows exponentially over time.
ETFs for Dividend Investors
| ETF | Focus | Yield (~) |
|---|---|---|
| VYM | High Dividend Yield | 3.0–3.5% |
| SCHD | Dividend Growth | 3.5–4.0% |
| VIG | Dividend Growers | 1.8–2.2% |
| DGRO | Core Dividend Growth | 2.5–3.0% |
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Next: Growth, Value & Thematic Investing — identifying high-growth opportunities, avoiding value traps, and navigating investment themes like AI and clean energy.
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