The 8 Rules Of Dividend Investing

Dividend investing involves accumulating stocks that issue dividends to generate a steady stream of passive income.

Rule #1: The Quality Rule

Invest in high quality businesses that have a proven long-term record of stability, growth, and profitability. There is no reason to own a mediocre business when you can own a high quality business.Rank stocks by dividend history and corporate history ,the longer the better. Stocks must have paid steady or increasing dividends through the worst periods of financial stress and turmoil to be eligible for inclusion in your portfolio.

Rule #2: The Bargain Rule

Invest in businesses that pay you the most dividends per rupee you invest. All things being equal, the higher the dividend yield, the better. Additionally, only invest in stocks trading below their historical average valuation multiple to avoid investing in overpriced securities. So rank stocks by dividend yield. Only stocks trading below their say 10 year historical average valuation multiple are eligible for inclusion in your portfolio.

Rule #3: The Safety Rule

“The secret of sound investment in 3 words; margin of safety”– Benjamin Graham .If a business is paying out all its income as dividends, it has no margin of safety. When a business downturn occurs, the dividend must be reduced.Hence have no place in your portfolio.

Rule #4: The Growth Rule

“All you need for a lifetime of successful investing is a few big winners”– Peter Lynch.So invest in businesses that have a history of solid growth.

Rule #5: The Peace of Mind Rule

Look for businesses that people invest in during recessions and times of panic. These businesses will have a relatively stable stock price that will make them easier to hold for the long run.Identify such scripts by ranking stocks by their long-term volatility and beta

Rule #6: The Overpriced Rule

Sell when the normalized P/E ratio is over 40.

Rule #7: The Survival of the Fittest Rule

When a company reduces or eliminates dividend payment ,admit the business has lost its competitive advantage and reinvest the proceeds of the sale into a more stable business.

Rule #8: The Hedge Your Bets Rule

“The only investors who shouldn’t diversify are those who are right 100% of the time”– John Templeton. Accept you’re not infallible. Spreading your investments over multiple stocks reduces the impact of being wrong on any one stock.

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