When considering which shares to invest in, many people primarily take into account what the capital gains will be, how much the share price will increase. Over time, I have found that I prefer investing for income, investing in companies that pay a decent dividend. I particularly prefer those shares that have a high dividend yield (dividend divided by share price = dividend yield). The dividend yield tells you how much you are earning on a particular share in dividends alone. The value is easily compared to what you would earn if the money was for example just sitting in a bank account. Many dividend-paying companies increase the dividend they pay over time causing your dividend yield to increase.Assume for example that you bought a share at 100, and the annual dividend is 5. The dividend yield is 5. Over time, the dividend is increased and some years later the company is paying 15 per share. If the share price is now 300, the dividend yield of any new shares is still 5, but on the shares you originally bought (assuming you still hold them), the dividend yield is now 15%. Even without the gains, that is a good return.

So why am I so keen on dividend investing? Looking back in time and with a long-term view, shares have mostly outperformed any other kind of investment, and dividend-paying shares have outperformed non-dividend paying shares. Taking a UK centric view, according to ABN AMRO, £1 invested in shares in 1900 would have become £161 by the end of 2006 on capital gains alone, but if dividends had been re-invested, you would have had ended up with £21,174.

Dividends usually mean the company in question is actually making money and steadily increasing dividends usually means that earnings are increasing. Interestingly, Enron paid a dividend, but compared to their reported earnings, that dividend was steadily becoming smaller. The accounts of a company can hide a lot of relevant information, but faking real cash is difficult.

So the trick is obviously to buy shares where the dividend is regularly being increased and where the dividend yield is high. To me, a high dividend yield on new shares is anything above 3. Unfortunately you can’t just blindly go after shares with a high dividend yield. The dividend yield increases as dividends are increased, but the dividend yield also increases if the share price falls. And it should be obvious that you don’t automatically buy a high-dividend yield share if the dividend yield is increasing because the share price is falling. You will first want to find out why the share price is falling.

Below you will find some links to webpages with more (and more detailed) infomation on dividend investing:

…dividend-paying stocks outperform the average stock, and stocks with rising dividends have, in most periods, ranked among the highest performers.

www.mhinvest.com

According to Ned Davis Research in Venice, Fla., Standard & Poor’s 500 Index dividend-payers returned a shade over 10% per year from Jan. 31, 1972 through 2005, while the overall index grew by 8.5% a year. (The non-payers returned a paltry 4.1%.)

www.financial-planning.com

There’s a good deal of research that shows dividend-paying stocks tend to outperform all other stocks over the long term, and they tend to do so while offering below-average risk to boot.

www.fool.com

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