Dividend investing Vs. Income investing
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Weekly Market Update 🗒️💡
McDonald’s (MCD) is closing its U.S. corporate offices Monday - Wednesday in efforts to protect employees’ comfort and privacy as the company lays off hundreds of workers as part of a global restructuring move.
The NASDAQ dipped as a spike in oil prices added another threat to an economy already struggling with interest rate hikes and bank failures.
Yesterday was the first trading session for the month of April, which has historically been the best month of the year for the Dow Jones. In April, the index has historically gained 1.9% since 1950.
General Motors (GM) said that its first-quarter U.S. sales rose 18% from a year ago, to just over 600,000 vehicles delivered. This is a large rebound from the supply chain issues that limited production in 2021 and early 2022.
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What is Dividend Investing?
Dividend investing is an investing strategy by which the investor buys shares in companies that make regular (and usually growing) payments to shareholders as a type of “reward” for buying and holding their stock.
How it works:
Dividend investing is actually quite simple and one of the easier investing strategies to commit to. Dividend stocks will typically payout every 3 months, otherwise known as a quarterly paying dividend stock, although some do payout every month.
When you own a dividend stock you are entitled to the dividend, provided that you held the shares on or before the ex-date. There are different dates to be aware of when dividend investing, but we won’t get into that right now.
When it’s time for the company to finally payout the dividend to its shareholders, your total payment is calculated based on how many shares you own.
For example: if you own 100 shares of a stock paying $2/share, you would earn $200 in dividends that year.
Some dividends are “safer” than others. Dividend sustainability and growth are something all dividend investors are constantly chasing. The point of dividend investing is to build up a stream of income that pays you for the rest of your life but also grows on itself every year through reinvesting and dividend hikes.
If you want to learn more about analyzing dividend stocks, I created a course that shows you step by step how I do my dividend stock analysis to make sure I’m buying the “safest” ones. Click here if you want to check it out.
What is Income Investing?
Income investing is often confused with dividend investing, but they are not the same thing.
While dividend investors focus on growing dividends, income investors focus on predictable dividends.
The difference is simple: dividend investors are thinking 10-20 years down the road and income investors are thinking about today.
Income investors will often look for the stock with the highest yield, in other words, the highest “bang for their buck”. When the stock market starts falling, investors look for other alternatives and ways to preserve their capital. Pulling your money out and putting it into a savings account may not be the best option as we know savings accounts pay next to nothing in interest.
So often you’ll see investors buy high-yielding stocks or even income ETFs (which we’ll get into later) to preserve some of their capital while the stock market continues to fall.
This strategy works in the same way as dividend investing, which is why many people get them confused, however, the main difference is that income investors don’t care about dividend growth. They only care about how much money they’re making today.
For example:
Let’s say we have two stocks A and B.
Stock A has a 3% dividend yield with a 5-year dividend growth rate of 15%.
Stock B has a 7% dividend yield with a 5-year dividend growth rate of 3%.
The dividend investor would buy Stock A because it has the highest chance of growing its dividend over time judging from past performance.
The income investor would buy Stock B because it offers the highest dividend today.
Similar strategies, different motives.