There are many important questions to ask when investing in dividend stocks. Among other things, it is crucial for income investors that the dividend remains sustainable and stable for decades. This in turn gives rise to other criteria such as history, distribution ratio or business model.
For me, another issue besides the quality of the stock is crucial. Unfortunately, this topic is often overlooked. So let’s take a look at an essential angle when investing in dividend stocks. It mainly affects your goals and also your personal finances.
The most important question when investing in dividend stocks: is it enough?
Perhaps you have already indirectly asked yourself this question: Is that enough? It means whether a stock’s dividend potential aligns with your financial goals. That can be applied in detail. But also in regard to the very specific dividend of a single distribution share.
Take, for example, many classic dividend stocks that currently have attractive and stable dividend yields of 2% to 3%. Here one may well wonder if this distribution performance is sufficient. Yes, you should. If you want to generate passive income of €30,000 per year with a dividend yield of 2.5%, you will ultimately need an investment of €1.2 million. And that would be a value that still has to be understood gross.
Of course, the quality of a single stock with a 2.5% dividend yield, or generally a small payout, may make it worth investing in anyway. However, if you want to achieve financial freedom as an investor, you should at least aim for a certain amount. Of course, this 2.5% dividend yield is just a snapshot. With strong dividend growth, you can eventually reach this amount.
Still, with all the focus on quality and sustainability, this question is crucial when investing in dividend stocks: Is what I’m getting enough? Can I really achieve my goals with this? Or do I prefer to take a detour if I invest in such a stock despite its defensive class and quality? Time, dividend yield, growth and company-oriented quality play a role here.
A holistic approach
This question opens the door to a holistic approach when investing in dividend stocks. Of course, one should never forget to qualitatively evaluate each investment. But it’s still crucial to focus on the big picture and your own financial goals. Closing a pension gap or financial freedom: much is possible.
Whether one stock or the alignment of the entire portfolio is enough for this is of crucial importance. Therefore, investors should always give some weight to this question.
The article The Ultimate Question When Investing in a Dividend Stock first appeared in The Motley Fool Germany.
Motley Fool Germany 2022