Dividends

My View on Dividend Investing

As described in my channel trailer, substantial portion of my capital is deployed in blue chip investments. While some of my blue chip holdings do pay dividends, I am not a traditional dividend investor because dividend yield is not the first metric I look at when picking stocks. 

I see it more as a supplementary income stream for holding a stock and couple it with my covered call strategies.

 

A traditional dividend investor might look at highest yield companies such as AT&T and Imperial Brands. The problem with this approach is that these companies typically expose the investor other types of risk mainly in form of lack of growth. As I am a long-term investor, I want stock price appreciation to be my primary means of growing capital. Highest dividend companies typically lack this. If you are above a certain age and want to secure a regular income stream in retirement, traditional dividend investing could be a good approach but it is not one that I follow.

My target companies are typically the ones that have a healthy balance between growth and dividiends. INTC, WMT and BAC, KO are some examples. I do pay attention to dividends when I pick my covered call targets and I like the ones with a 1.5% - 3.5% yield. 

 

The main beauty of dividends in covered call strategies is that you still receive a fixed payment even when the stock price goes substantially below your average price. In this case, your covered call returns would likely dip because you would have to pick even further OTM (or lower delta) strikes (because otherwise you might end up selling at a loss if your shares end up getting called) with low premiums. Dividends do help in cases like this by rewarding the investor's patience and reducing the effective cost base of the underlying.