A dividend investor is somebody who invests in stocks with the primary aim of making money from dividend payments rather than from selling the stocks at a profit. This strategy is usually seen as a lower-risk way of investing in stocks, albeit with less potential for huge profits. Still, even well known, seasoned investors like Warren Buffet have used this option as part of their investment strategies.
Many people think of the stock market mainly in terms of buying stocks and then selling them at a profit. This can be hugely profitable if the timing is right and the stock rises rapidly. The main drawbacks are that the resulting income is much less predictable than with most forms of investment, and that stocks picked because they have the potential to increase in price spectacularly may also be the ones most at risk of a rapid drop.
What many people forget is that stockholders can also make money from dividends. These are payments made to stockholders from the companies profits, usually once a year, twice a year, or once every quarter. Dividends are effectively a way of sharing a company's profits among its owners, namely the stockholders.
The amount of dividends a company pays can vary immensely. It is partially to do with how much profit the company makes: the more money the company has, the more it can afford to distribute. The amount is also affected by the attitude of the company's directors; some companies even pay more in dividends than they make in profit, funding the deficit from the company's cash reserves in an attempt to attract new investors.
One of the most common tips for a would-be dividend investor is to look for established companies that are not particularly subject to trends in consumer behavior. This can include companies that make staple goods that consumers will always need, regardless of how well the economy is doing. It can also include companies that dominate a market and look unlikely to face serious challenges. In many cases, such companies have steady incomes and can afford to pay steady dividends. This can be a better tactic than looking for companies with unusually high dividends that may not be sustainable in the long run.
Warren Buffet is a well-known example of a successful dividend investor. For the most part, Buffet is a traditional "value investor," meaning he aims to sell stocks at a profit. Among his major investments, however, is Coca-Cola®, in which he has held a large amount of stock for more than two decades. Buffet now receives around one-third of his original Coca-Cola® investment back in dividends each year.
