Investing in stocks to earn a return through dividends can be an excellent way to generate passive income and build wealth - and it requires relatively little upkeep.

Characteristics of a good dividend stock

You need to get familiar with the important characteristics that make a good dividend-paying stock. This is the kind of stock that you’d want to keep in your portfolio year after year. Specifically, these characteristics fit into two camps:

**Qualitative** - Looking at the business itself and what it does

**Quantitative** - Analysing the numbers

Big ideas

The qualitative features of a company are what it does, the industry it is in, how long it has existed etc. We give the example of Warren Buffett’s favourite Coca-Cola.

Quantitative measures such as the price-to-earnings ratio are formulas used to judge the size and health of a dividend.

Qualitative characteristics

The tactic of the stock brokers led by Leonardo Di Caprio in the Wolf of Wall Street was to first offer their clients a blue-chip stock to gain their trust before flipping them into pink sheets and penny stocks that earn very high commissions.

The first qualitative characteristic you should look for is that the company should not be the kind of “exciting opportunity” that stockbrokers would call you about! The company must be stable. If investors make money in exciting companies, it will be through the growth in the share price - not through dividends.

With a good dividend stock portfolio, you shouldn’t need to be constantly following the market with sophisticated techniques. You are a long-term passive shareholder directly benefiting from the profitability of a company. Dividend investors are generally looking to avoid risk and excessive stock price fluctuations so that they can comfortably grow their portfolio incrementally over time.

Understanding a company's stability and the industries, it operates in doesn’t have to take forever. A combination of research and common sense is needed. You need to get to know the company and what it does and decide whether it is a business that has good long-term prospects.

Watch our video

Warren Buffett’s stock with a good dividend

Warren Buffett has held shares of Coca-Cola since the late 1980s; the company accounts for about 8.5% of Berkshire Hathaway's portfolio at the time of writing.

79,000 employees - this is a huge company. 

It’s in the consumer / non-cyclical sector - which is generally seen as defensive in a portfolio.

It’s in the beverage industry - which is a stable industry to be in, although not all beverage companies are stable.

Owns major brands, Coca-Cola obviously, Sprite, Fanta but also Costa coffee, Vitamin Water, Minute Maid etc. 

To further your knowledge of a company, you can join the quarterly conference call that management holds after releasing quarterly earnings. Here you can hear the management discuss the company and hear analysts asking about what they think is currently important for the business.

It really doesn’t need to take more than a few hours to investigate a potentially good dividend stock to buy, which you might end up being invested in for years - even decades!

Quantitative characteristics

Here are 5 quantitative techniques to help decide what is a good dividend stock.


**1. Dividend yield**

This is probably the most basic technique for filtering your stock choices. The dividend yield is how much return in dividends you will get from your investment in a particular stock.

Dividend yield = (Dividend per share / Stock price) x 100

If the share price is $100, and it pays a dividend of $5 a year then the dividend yield is 5%.


When dividend investing, one of the things to be avoided is what is called a "dividend trap" stock. These stocks pay a high dividend and look like great investments if you’re only looking at the dividend yield. That high dividend acts like blinkers over people's eyes - they see the big returns and miss some big underlying issues with the company.

As a general rule, It's not advisable to apply a single criterion. Try to include various techniques and give yourself the best chance at filtering out the bad stocks.


**2. Dividend growth rate**

Stable companies are to be cherished but one thing that should not be stable is the dividend payout. The best scenario is when companies raise it gradually over time. That way the investor earns more and has a better chance of keeping pace with inflation.

A company's history of past dividend payments is publicly available information and can easily be found online.

Payout history of Coca-Cola

Past payouts are not a prediction of the future but a good dividend stock history does demonstrate that the company is capable of doing what you need it to do.


**3. Payout ratio**

Since investing is all about holding for the long term, you want to make sure the stock you choose can keep up its payments. One of the ways to do that is to check the payout ratio, which is what percentage of the company's profits are paid out in dividends.

Dividend payout ratio = Dividends paid / Net Income

A payout ratio in the 40-50% range means more than half of the company's profit is reinvested into growing the company.

Generally speaking, a lower payout ratio is more sustainable. It can also mean a lower dividend yield. This is a balance that you must strike when selecting your stocks.


**4. Debt-to-profit**

Another potential threat to the company’s stability is if it has a lot of debt. A company with too much debt may be forced to pay off debt instead of paying dividends.

Debt-to-profit = Total Debt / Annual Net Profit

The debt-to-profit ratio is often called "gearing". It can be seen in corporate reports expressed as debt-to-EBITDA. Generally, the lower the "gearing", the less risk the company carries. 

Sometimes raising money through debt makes sense if, for example, it means taking advantage of low interest rates or increasing production capacity. Having debt isn't necessarily a bad thing; what matters is being able to pay off the debt, and the debt is being used to grow.


**5. Price-earnings (P/E) ratio**

If there’s one ratio people tend to know about, it's the P/E ratio, and for a good reason. This is the ratio between the price of the stock and its earnings.

PE ratio = Share price / Earnings per share (EPS)

High P/E ratios (over 20) typically mean a stock is overvalued, while low P/E ratios (closer to 10) mean a stock is probably undervalued. 

Growth stocks tend to have high P/E ratios because they are not earning high profits. This is because the money earned is being reinvested to foster growth. Dividend investors are not looking for high-growth opportunities but rather companies with stable earnings.

When you’re planning to hold onto a stock for a long time, there’s no need to go bargain hunting, but you don’t want to buy a stock with a high valuation. By definition, the slower growth of a stable company does not justify a high P/E ratio, meaning the share price has a higher chance of falling below where you bought it.

Recap

There are a number of factors that can make a stock a good dividend stock. From a qualitative standpoint, the stock is typically a well-established company with a strong track record of profitability and a history of paying out regularly to shareholders. The company should also have a solid financial position, with a healthy balance sheet and consistent cash flow.

From a quantitative standpoint, a stock should have a high dividend yield (DY) and a low payout ratio. The DY is a measure of the annual payout as a percentage of the stock's current price, and the payout ratio is a measure of the company's dividend as a percentage of its earnings.

Good Dividend Stock - What makes a good dividend stock? Learn about main characteristics of a good dividend stock like: Yield, Growth Rate, Payout Ratio, P/E ratio.

Good Dividend Stock Characteristics: Dividend Growth, Payout Ratio

What makes a good dividend stock?

Inflation devalues the money you earn from investing, so it should be given some special consideration - but there is no need to worry! There are actions that you can take.

Inflation is the devaluing of money. It hurts everyone who earns money.

It’s imperative to outrun inflation by increasing your earnings above and beyond the rate of price increases. 

Putting your money in assets that typically return more than the rate of inflation is one of the best ways to beat inflation.

Why is inflation bad for investors?

John Maynard Keynes, the legendary economist, described some inflation as a good thing. Keynes argued it helps prevent the paradox of thrift. It stimulates the economy by encouraging people to spend. The crux of his argument is you are more likely to buy something today if you know it will cost you more in the future.

This incentive to spend increases the demand for goods and services. If this is true, why is it that there is such disdain for inflation?

**”If inflation continues to soar, you are going to have to work like a dog, just to live like one.”**
George Gobel

**“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”**
Ronald Reagan

**“Inflation is the one form of taxation that can be imposed without legislation.”**
David R Morgan

In 1977 David R Morgan published a piece of work titled over taxation by inflation. Morgan argued that by failing to amend tax bands to match the higher cost of living during the 70s, the government had essentially shifted an extra tax burden onto the general public.

Nominal and real returns

There is a widely accepted logic that global stock markets tend to return around 9-12% a year on average over a long period of time. That number comes from [120 years of returns as presented by Credit Suisse](https://www.business-standard.com/article/markets/in-120-years-equity-returns-have-outpaced-bonds-bills-credit-suisse-120022600486_1.html). Of course, the returns year to year can vary wildly. 9-12% is a nominal return.

**Nominal return** = Investment earnings
**Real return** = Investment earnings adjusted for inflation

If inflation is at 9% and your investments make a nominal return of 9% then your real return is nothing. You have not moved up the hill at all. You are right where you started.

Real returns are what investors should care about and inflation is a disaster for real returns. It eats away at the return rate you achieve by destroying the value of the money you are making.

What causes inflation?

A prerequisite for price inflation is monetary inflation i.e. central banks printing money. An increase in the money supply reduces the value of the money already in existence. 

The government benefits from this in two ways. It reduces the real value of government debt and also improves nominal tax revenues. The government can use the devaluation of money to make their debts worth less and rising prices to make their income look better on paper. 

But inflation is a disaster for households. The value of their savings and their wages shrink as the currency they work so hard for can purchase fewer goods and services over time.

Investopedia created a timeline of the cost of a cup of coffee to demonstrate the real-life effects of inflation. 


How inflation has changed the price of a cup of coffee over time

This is why there are so many negative quotes about Inflation. 

Inflation is the devaluing of money. It hurts everyone who earns a fixed amount of money, like a salary. It’s imperative to outrun it by increasing your earnings above CPI.

**CPI** = Consumer price index. It is the most widely-followed calculation for inflation. It measures the annual change in price of a basket of consumer goods.

Think of inflation like a hill. The steepness of that hill is the rate of change in prices, and the steeper it is, the harder it is for you to make it to the top.

Could you beat inflation?

Should investors prepare for higher inflation? Yes. The only choice is to attempt to outrun inflation. That means putting your money in assets that return more than the rate of inflation.

The real value of £1000 - then and now

The above graph demonstrates the performance of stocks, savings and cash over 20 years. Equities (another name for stocks) dramatically outperformed the others and is the only asset that gained value over the time period, even when accounting for inflation. Cash and savings accounts lost value.

**Inflation hedge** = An investment that is intended to protect the investor from decreased purchasing power of money caused by inflation.

One of the reasons the stock market acts as a good defense against inflation is that many businesses have the ability to increase prices. In fact, a general environment of rising prices can only happen when businesses raise their prices. The ability to raise prices gives those businesses the unique ability to continue to grow ‘real profits’. Investing your money into these businesses that can still grow profits is a form of inflation hedging for long-term investors.

This contrasts with cash which is specifically what is losing value and bonds which are in essence IOUs that have fixed regular payments (like a salary) known as the coupon that lose real purchasing power.

However, not all businesses can magically sidestep inflation. 

For example, Kraft Heinz was arguing with the UK supermarket chain Tesco about its proposed price increases. Heinz said it needed to raise the price of Heinz tomato ketchup, but Tesco disagreed.  The stalemate left Tesco's shelves empty of Heinz products. This is an example of a company’s inability to pass on the costs of inflation to consumers.

What does inflation mean for investors?

Rising interest rates are the standard policy reaction of central banks to high inflation. So when considering the right course of action, investors must also consider the impact of rising interest rates.

As interest rates rise, debt like mortgages and credit cards become more expensive to maintain, reducing the amount of money people have to spend. Less spending means less profit for businesses. Less profit for businesses in theory means share prices fall.

Debt becomes more expensive for businesses too, making it harder for them to borrow, reducing their ability to grow and or service any existing debt they already have.

Rising interest rates make fixed-income investments more attractive for some investors. To compensate investors for higher inflation, companies and governments issue bonds with higher coupons.  Seeing a bond yield go from a 1% return to a 4% return tempts many who had been invested in stocks to flip to a more predictable return from bonds, even if it still falls short of beating the rate of inflation. This again means more downward pressure on the stock market.

So as interest rates rise to combat inflation, there is an increasing number of incentives for investors to pull funds from the stock market.

Inflation forces investors to scramble for solutions

Both inflation rising and Interest rates going up in 2022 marked the return of market conditions not seen since the 1970s. As represented by 10-year Treasury yields, interest rates peaked in the early 1980s and trended lower for close to 40 years.

USA 10 year treasury yields 1962-2021

Is inflation good or bad for investors? Nobody knows for sure. That means there is uncertainty around how stocks will perform if inflation remains high. And if there is one thing markets hate it is uncertainty.

But whilst it is new for many investors, world markets have been through periods like this before. We all know that past performance is no guarantee of future results but for the last 100 years, the stock market has outpaced the returns of other assets.

Seeing your stock market investments fall in value is an emotional challenge. As an investor, you have to remind yourself that even when things seem bad, we can never know what the markets will do in the short term so you shouldn't be trying to amend your investing strategy in reaction to short-term factors.
 
The most important thing we can do as investors is to keep running up that hill. 

Should Investors worry about inflation? Is it bad for investors & Stock markets? What causes inflation and how to beat it? How do investors respond to inflation? FAQ

Should Investors Worry About Inflation - Could You Beat Inflation?

Should investors worry about inflation?

Should Investors worry about inflation?

There’s an old expression about investing - *'It’s about time in the markets, not timing in the markets’*.

Financial markets go through periods of highs and lows so you would think a strategy to only buy near the lows and sell when markets were high would be the path to long-term profitability.

However, the information presented in this article shows that even if you could time the market perfectly, you still might not get the best investment returns.

Do you think successful investing is all about buying low and selling high? It’s time to think again and we’re here to help.

The experience of three pensioners who unwittingly made significantly above-average investment returns perfectly illustrate why time in the market beats timing the market.

Research shows it is prudent to stay invested through thick and thin to benefit from long-term gains in the market.

A test of 3 market timing techniques

Let's take for example the investing journey of three friends. Tiffany, Brittany and Sarah.

It's 1979, the three friends meet up. They all want to start investing and agree they can afford to invest a certain amount each month into the S&P 500 index, the top 500 businesses in America. They can agree on the amount and what they are going to invest, but they really cannot agree on when they should be investing the funds.

Over 40 years of market data, you can compare three different timing approaches to investing a total of $96,000, which works out to $200 a month. 

**The 3 timing approaches:**

Buying into the market either at the worst times ever i.e. right at the top of the market just before large crashes.

Buying at the best points in those 40 years i.e. right at the bottom of the market.

Consistently invest  200 a month (rain or shine).

The three friends clearly had time on their side and it's this long-term approach that is the key to their success but the difference in results between the three is striking.

When they sat back down 40 years later and compared results, who do you think had performed the best? 

**Tiffany** had terrible timing. She saved her money in a high-interest savings account and only pounced on the S&P 500 the day before a major crash. Right at the top. For example, she invested on Black Monday in 1987 or the day before the financial crash in 2008. But Tiffany never sold. She left the money to work and continued saving up in her savings account ready for the next market high. At the end of the 40-year period, Tiffany had invested $96,000 and had a very respectable **$663,594.** 

**Brittany** on the basis of her timing must be one of the best investors of all time. Saving her money again in a high-interest savings account and only bought at the very bottom of the four biggest crashes in that 40-year period. Brittany could not have bought at better times and she was rewarded. Her $96,000 turned into almost a million at **$956,838.**

**Sarah** was not interested in market timing and simply invested her £200 dollars into the S&P 500 every month when she got paid. No savings, just consistently buying over the 40-year period and Sarah ended up with by far the most, **$1,386,429.**

Example data source: [Financial independence subreddit](https://www.reddit.com/r/financialindependence/comments/iq30q8/timing_the_market_absolute_worst_vs_absolute_best/)

Timing the market vs buy and hold

How is that possible? How can Sarah with her lazy approach beat the investing genius of Brittany who timed the market perfectly?

Brittany with her impeccable timing only invested a handful of times over the forty years. This meant for large amounts of time her money was sat on the sidelines, earning a paltry 3% interest rate on her savings instead of being invested. When money is invested in the stock market, it is earning dividends, which can then be reinvested.

Dividends are the payments you receive from a company for owning its shares. It is a payout from the profits and historically has made up a large part of the total returns investors make.

Estimates are that since 1926 32% of all the returns of all the money made from investing in the S&P 500 have been from dividend payments; the rest is in the growth of the value of businesses.

Breakdown of the S&500 total returns

When your money is out of the market you are instantly forgoing these potential returns. Sarah did so well because by having her money in the market she was able to benefit from the compounding effects of continuously investing and the reinvestment of dividends.

Buying low and selling high

What if you could pull your money out of the market when it is at highs and then buy back in at the lows? The goal of saving your portfolio from significant declines in stock values by selling everything at the top and sitting on your cash until the bottom, then buying back in, feels logical.

The problem is that it is almost impossible to do consistently. Even the best investors in the world fail to turn short-term investment options with high returns into a satisfactory set of long-term results. The problem is you don't just need to be right in your assessment of the market (that it has topped or bottomed) but you also need to time it correctly. 

For example, Micheal Burry shorted Tesla stock in 2021 because he felt the TSLA price would fall because it was overvalued. He was right, it did fall in 2022 but the problem was that he was much too early and Tesla's price rose significantly after he made the bet, forcing him to close his position too soon. Investing early is akin to being wrong, because both cost you money.

**“The idea that a bell rings to signal when to get into or out of the stock market is simply not credible. After nearly fifty years in this business, I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has.” **

If you are still not convinced and think timing the market is a good idea, consider this. Over the 40 years (10,000 days) that the ladies above invested, just 10 days accounted for nearly two-thirds of all the returns. So by trying to time the market, you are saying you are good enough to not miss any of those ten days. That would take a lot of skill and good luck.

Market timing vs investment returns - How to calculate investment returns? Quick investment returns: buy low and sell high? How to increase investment returns? FAQ.

Market Timing vs Investment Returns - Quick Investment Returns

Timing the market vs time in the market

There are some important differences between big and small companies that present both opportunities and risks when investing in their stocks.
 
*“Smaller companies have greater growth potential and tend to offer better returns over the long-term.”* - Investopedia

Small caps vs large caps

But If the goal of investing is to generate a return, why don’t we all invest in small companies?

By extension, why the most popular investments are index funds, which track indices like the S&P 500, made up of the largest 500 companies in the USA? These funds have billions of dollars invested in them. If the long-term returns are anything to go by, funds with small-cap stocks should be the most popular.

Like all things in investing, things are not as simple as they seem.

The law of diminishing returns dictates that the growth rate for a business must slow as it gets bigger. The higher potential growth of small businesses makes them appealing.

Smaller businesses fail at a much greater rate than big businesses, making the risk of investing much higher.

There are always exceptions. Today’s mega-cap companies continue to grow rapidly, and many smaller businesses are swallowed up by the large ones before they mature.

IBM - When investing in big companies works

**“Who says elephants can’t dance?”**

Gerstner was brought in as CEO of IBM in 1993 when the company was losing $16 billion per year, and many suspected it was doomed for bankruptcy. But just 3 years earlier, IBM had its most profitable ever year. This was a business giant struggling to adapt to a rapidly changing computer industry. 

IBM's problem was it was just too big. Any decision took too long to pass through the IBM management bureaucracy. Newer, faster, smaller companies were outmanoeuvring it and were able to adapt to the rapidly evolving computer market quicker than IBM, a company that played a significant role in establishing the sector in the first place.

When Les stepped through the front door, the process was well underway to break the business up into parts and call it a day. This giant was destined for the elephant graveyard, but Les had other plans. There was no breakup, and the company has survived to this day.

Is investing in small companies always better?

It's a convincing narrative that small company investments perform better because they can out-move sluggish giants (like IBM). 

Google, Facebook and Uber are examples of big multinational companies that were started in the last 10 years. If you had invested early into some of these and held on, your investment would be doing very well.

Which big tech investment paid off the most?

However, large companies can and do become small companies or go out of business. Nokia was the world’s largest mobile phone company over a decade ago. Nokia still exists but has closed its mobile phone division. 

Companies seem to explode onto the scene as part of a new business trend on a regular basis but are dying at a quicker rate too. In 1958 the average company in the S&P 500 stayed there for 61 years. Today the number is just 18 years.

Average company lifespan on the S&P 500 Index

Before you rush into the ‘next big thing’ for every Airbnb and Alphabet that has changed our lives, many more have tried and failed. When investing, you need to be aware of survivorship bias, where we hear much about the successes but very little about the failures.

[A study into angel investments](https://venturesouth.vc/how-do-angels-avoid-losing-money/#:~:text=50%25%2D70%25%20of%20individual,in%20the%20right%20hand%20tail.) (investments into companies right at the beginning of their life) showed those investments resulted in losses between 50-70% of the time.

How to classify a small vs big business

The size of publicly traded companies is classified according to market capitalisation. That is the sum of all their shares multiplied by the share price.

Market capitalisation = No. shares x Share price

This is the general guidance on how to define a big vs small company:

**A Micro-cap** business is worth between $50 to $300 million
**Small cap** is worth $300million to $2 billion
**Mid-cap** is worth $2 billion to $10 billion 
**Large-cap** is worth $10 - $200billion 
**Mega-cap** is anything worth more than $200 billion

We can group any business into these categories based on market cap. To do that on the Trading 212 app go to the Info & stats section of the company in question, and you can see the market cap under key ratios.

By categorising companies by market cap, it is possible to test whether the theory of smaller companies being more nimble shows through in investing returns. Can these micro businesses out-tango the titans?

Big business vs small business stocks

There is a school of thought in the investing world known as factor investing. This is simply investing in businesses that exhibit a certain quality or factor on the understanding that traditionally that provides better returns. 

One factor you might have heard of is investing based on the ‘value factor’. Warren Buffett is a value investor and very much adheres to this strategy. In fact, there are over 400 different factors.

The factor we are focusing on here is the size factor, i.e. buying smaller high-growth stocks instead of large blue chip stocks. Whether the size factor works is disputed.

The size factor refers to the empirically verified phenomenon that mid and small-cap stocks, with a market capitalisation of between $2 billion and $10 billion, generally outperform large-cap stocks. Source: [Risk.net](https://www.risk.net/definition/size-factor)

However, in an article titled [Is the size factor broken? No, it never existed](https://www.etfstream.com/features/is-the-size-factor-broken-no-it-never-existed-in-the-first-place/#:~:text=No%2C%20it%20never%20existed%20in%20the%20first%20place,-No%20outperformance%20over&text=Academics%20and%20investment%20houses%20alike,existed%20in%20the%20first%20place.) in the first place Tom Ecket presents evidence to prove the size factor isn't empirically proven

Investing in big companies that are getting bigger

Big businesses are big for a reason. They are good at what they do. The notion that a big business becomes stale and fails to evolve is only true in some cases. The reality is many large businesses continue to grow and evolve. 

It makes sense that big businesses continue to grow because they have the manpower and financial resources to do it. They have the budget for research and development (R&D) and can offer attractive incentives to get the best staff. The dominance of the big 5 US tech stocks in modern times is proof that big businesses can get much bigger.

Tech companies dominate S&P 500 Index

The gap between the median value of a small cap and a large cap stock has widened, and so has the profitability of larger businesses vs small. The 2008 financial crisis and the covid-19 pandemic have exacerbated this trend. The big corporate guns have the most resources to survive downturns. They can also just acquire any smaller businesses showing potential (and potential competition).

The appeal of investing in small companies

The reason smaller companies remain a popular hunting ground for investors comes down to the opportunity they represent. 

The efficient market hypothesis argues that any information that comes to the market is instantly priced in, and for this reason, it is impossible to beat the market. This hypothesis applies to the large public businesses that make up the stock market. There are millions of experts, analysts and budding investors looking at everything these companies do. 

Large-cap stocks get so much attention that finding information that others have missed is next to impossible. Small-cap stocks do not get this same level of attention, so it could be argued that there is a greater potential opportunity there for investors who are inclined to research these businesses.

It’s important to consider the size of the companies you are investing in when you assess the opportunities and risks and balance your portfolio.

Ultimately, investors must look to invest in good companies with the potential to increase cash flows in the future, and it technically does not matter what size the company is. Small companies can become big and vice versa.

Investment in Companies - Is it better to invest in Big or Small companies? Big business vs small business stocks - Is it better to invest small or large amounts?

Investment in Companies - Investing in Big vs Small Companies

Investing in big vs small companies

When to sell a stock can be as important as when to buy it. The specific timing will vary according to the specific situation, but the best method tends to be one of the four listed in this article.

Investors should spend as much time thinking about when to sell a stock as they did when deciding whether to buy.

Knowing when is the best time to sell stocks requires actively following the share price and news about the underlying business.

Selling a stock at the right time requires understanding the business and what it is worth and contrasting that with its market value.

Buffett’s best time to buy a stock

**“Our favourite holding period is forever.”**
- Warren Buffett

His strategy of holding on for the long term seems to go beyond the stock market. Buffet still lives in the same house he bought for $32,000 dollars in 1958. His friend Bill Gates once joked that Warren decided what food he liked at 6 years old and has eaten nothing but hamburgers and Coca-Cola since!

When should you sell a stock?

The best time to sell stocks is when one of these four conditions is met.

1. Sell when a better opportunity arises

**“I might mention that the buyer of the stock at $80 can expect to do quite well over the years. However, the relative undervaluation at $80 with an intrinsic value of $135 is quite different from a price of $50 with an intrinsic value of $125.”**


That is Warren Buffett saying he decided it was time to sell shares in a business trading at a discount so he could buy shares in other businesses at a bigger discount. To Buffett, the bigger discount represented a better option.

As an investor, you only have limited capital and it is your job to do the best you possibly can with that capital to earn the highest possible risk-adjusted return. Buffet reminds us that there are almost unlimited new opportunities coming along, and with only limited resources, quite often an investor has to sell one stock in order to buy another.

In this example, Warren Buffett has two stocks. He knows the share price for both and he knows what he thinks both of the underlying businesses are worth. Although he likes both investing opportunities, he has a favourite. As a good investor, he makes the decision to own the stock that is most undervalued and sell the stock that is less undervalued.

Make sure you know the intrinsic value of the businesses that you own. Sell if you think the capital invested is better used investing in another business.

2. Sell if the initial purchase was a mistake

Just like it is possible to rush into a relationship and realise it was a mistake, the same thing can happen with investments. Everyone makes mistakes and the only way to recover from them is to own up to them and move on.

Let’s use an investment in Zoom stock as an example. 

When covid-19 lockdowns were implemented in 2020, investors quickly realised that video meetings were about to become the norm and they rushed to buy businesses in the space.

Zoom (ZM) a company offering video-conferencing software saw its share price jump 132% in 4 months. 

Zoom Technologies (ZTNO) rocketed to an 1800% gain.

Unfortunately, the gains for ZTNO were because of investors who thought they were buying ZM. They bought the wrong zoom! Zoom technologies is a completely different business from Zoom and has nothing to do with video conferencing. Once the mistaken buyers realised this, the ZTNO share price tanked.

3. Sell when the price goes up a lot

Imagine you wake up one day and your position in a business is worth 18 times what it was a few days ago. This is probably one of the best opportunities you will have to sell at a high price.

As a reminder, what a company is priced at and what it is worth are two very different things. Rapid rises in a share price in the short term can often be caused by irrational exuberance rather than the underlying fundamentals. Savvy investors can use this as an opportunity to sell out and buy into a new position.

If you are fortunate enough to buy a stock that suddenly rockets in value, the first thing to ask yourself is: Has anything changed with the businesses or is this rise being caused by something unsustainable?

This third strategy often fits neatly alongside the first strategy. You have a stock to sell that has become overvalued (or a lot less undervalued). This likely leaves lots of other stocks that could be bought at relatively better valuations.

4. Sell when the fundamentals change

Nothing lasts forever. The best investments last for a long time, but many good investments will eventually turn bad. Here are two examples showing that when to sell stocks is often not ‘forever’.

Buffett sold shares in UK supermarket chain Tesco when it became embroiled in a £250 million accounting scandal. He also sold out of positions in airline shares when it looked likely that the Covid-19 pandemic would impair air travel

Companies can change and so can the business landscape in which they compete. As an investor in a business, we need to be able to recognise when this is happening and be level-headed enough to act on that knowledge.

How to know when to sell a stock

Investing in individual companies requires research to understand the value of the businesses and how that compares with the value implied by share prices.

Your understanding of the value of a business and keeping up to date with movements in the share price provide all the data you need to know exactly when the sale of stock is appropriate.

**As a reminder, sell a stock:**

When the price rises a lot unjustifiably


All of these reasons for selling a stock share a common theme. They centre around a good understanding of the business you are invested in and rely on your clear justification for why you bought at a certain price. 

Investing in index funds is passive investing while the act of buying individual stocks is active investing. The clue is in the name. Investing in individual companies requires an investor to actively pay attention to them. 

There is work and research that needs to be done at the start before a stock is purchased and ongoing work to decide the best time to sell the stock.

When is the best time to buy and sell stocks? Buffett’s best time to buy a stock. How to know when you should sell a stock: Sell when a better opportunity arises.

Best Time to Buy and Sell Stocks - Can You Sell Stocks at any Time?

You’ve got to start your dividend investing career somewhere. An attainable starting point for many new investors is one thousand dollars. 

$1000 is a nice round number. If you’re from the UK then £1000 also works. It should be enough money to start a portfolio but a smaller amount than you one day hope to have invested.

Investing with small amounts presents some challenges, which we aim to help you overcome.


Before you even think about which stocks to add to your portfolio, you have to think about your goals. One important consideration is income vs wealth-building.

Investing in fractional shares gives you access to high-priced stocks in a small portfolio because it allows you to buy less than one share of a company.

Diversification can be achieved by selecting stocks from each of the 11 major sectors as well as by using ETFs.

What is a dividend portfolio?

A dividend portfolio is a collection of dividend-paying stocks that altogether aim to be well-diversified and give you the best chance of earning a consistent income. It’s fine to own stocks for other reasons but they just won’t be involved when making a dividend portfolio.

How to start a dividend portfolio

Having such a portfolio allows you to earn some passive income and generate wealth for the long term. You can adjust your dividend portfolio strategy to suit your own purposes.

Do you want a regular monthly income? You can do that by owning a portfolio of stocks that have payment dates every month. 

For example, with twelve stocks in your portfolio, you can make sure each stock pays its dividend in a different month. With 52 stocks in the portfolio, you can get paid weekly.

You can take this a step further by changing the weighting of each stock within your portfolio to make sure your monthly payouts are the same.


Say you invest in 3 stocks: 
     
- Stock A pays a dividend of $20 in February
- Stock B pays $30 in March 
- Stock C pays $40 in April

To even out the monthly income, you can buy more of stock A and less of stock C.


Instead of using the cash for income, you can reinvest to increase the value of your portfolio and grow your wealth over time. When focusing on long-term growth, you can attach more importance to the **size** of payments. When focusing on income, you can focus more on the **timing** of the payments.

How to build a good dividend portfolio with $1000

One of the first questions on your mind is likely: How many stocks should I have in my portfolio?

The best answer is **KISS** - keep it simple stupid!

Starting a dividend portfolio with $1000 can be done with 10 stocks with an average of $100 invested in each. You might think it is not enough but you can have a lot of variety in the size of the company and risk profile among 10 stocks. Also, there are 11 major sectors so it means you come close to covering all corners of the stock market. 

You only need to look at Warren Buffett’s Berkshire Hathaway to see that the top 10 stocks make up the bulk of the money invested.

Berkshire Hathaway's biggest investments

Keep in mind the $1000 is just your starting point. Adding to your portfolio with deposits and dividend reinvestments over time is a prerequisite for building long-term wealth.

An allocation of $100 per stock for the portfolio sounds simple enough, but what if one or more of the stocks you want to buy is priced over $100?


Using fractional shares for a small portfolio

Buying a suitable cross-section of large well known stocks is a challenge for any beginner dividend portfolio. 

Take Warren Buffet’s Berkshire Hathaway as an extreme example - at the time of writing, the stock price just ticked over $500,000. Just one of those shares, let alone nine others are too pricey for a beginner’s portfolio. Thanks to fractional shares, this is no longer a problem.

A fractional share is less than one whole share. Owning fractional shares allows you to buy less than one share of a company. Let’s say you want to invest $100 into Tesla stock but each share is worth $1000. You can buy 0.1 of a share for $100. 

When you start dividend investing, fractional shares will be invaluable. To illustrate how fractional stocks can work for our portfolio, here's an example of five stocks.

Apple - 1 Share = $165
Microsoft - 1 Share = $279
Visa - 1 Share = $211
McDonald’s - 1 Share = $252
Johnson & Johnson - 1 share = $181

Buying a single share of these 5 companies would cost $1088. By using fractional shares, you can reduce that to less than $500, leaving room for the next five shares in the 10-stock portfolio.

AAPL - 0.6 Shares = $99
MSFT - 0.2 Shares = $83.70
V -  Shares = $105.50
MCD - 0.4 Shares = $100.80
JNJ - 0.5 shares = $90.50

Using fractional shares, the cost of this portfolio is now $479.50.

With the Trading 212 app, it is even easier than that. Instead of selecting the number of shares, you can just select the amount you want to invest and the app automatically calculates how many fractions of shares that will be.


Fractional shares help you to fit your desired portfolio within your budget and let you invest in more companies over a diverse range of countries and industries.

How To Balance Your Dividend Portfolio

Balance is important when investing. Making sure that your portfolio isn’t overly reliant on one particular stock or industry will make your portfolio durable.

**Sectors**

Spreading your risk over multiple sectors of the economy will ensure industry risk is reduced. 
This is a list of the 11 major economic sectors:

Finding one company in each industry is the ideal way to protect a portfolio against adverse economic conditions. The logic is that when one sector may be struggling, another might be thriving.

**Dividend yield**

A simple way to diversify risk is to choose stocks with different size dividend yields. Yield correlates well to risk. That is because riskier companies generally have to offer higher yields to compensate investors for the higher risk than investing in ‘safer’ companies.

Flooding your portfolio with high-yield stocks means flooding it with risk. On the flip side, a portfolio of very low-yield stocks is going to have less-than-impressive returns. 

One strategy is to have a base of lower-yield stocks for safety, with a small allocation to some higher-yield stocks for higher potential returns.

Creating a dividend portfolio with ETFs

One way to supercharge the diversification of your beginner dividend portfolio is by adding an index ETF or an index fund.

An exchange-traded fund (ETF) is a basket of stocks that trade on an exchange just as if it were a single stock. It’s a great way of investing in many different stocks at once with built-in diversification.

If you are mostly investing in American companies, you might opt for an ETF based on the S&P 500. If you’re investing in the UK it might be the FTSE 100, or in Europe the Euro Stoxx 600.

How to grow a dividend portfolio with Trading 212

To help your portfolio grow you can reinvest the dividends received, giving you more stock from which to earn higher future payouts. Regular deposits into your portfolio are paramount, especially if you are investing for the long term. For your $1000 portfolio, adding $100 per month would be a great start if possible. 

There are a few different ways that you can start a dividend portfolio. One way is to invest in 10 different stocks, which can be a mix of large and small companies. Another way is to invest in a balanced mix of stocks and ETFs. And yet another way is to invest in fractional shares of stocks.

No matter which method you choose, the important thing is to start investing in a way that best suits your needs and goals.

Dividend Portfolio: What is Dividend Portfolio? Using fractional shares for a small portfolio. Learn how to create a strategy and grow your portfolio at Trading212!

Dividend Portfolio: What is & How to Create Your Dividend Portfolio

How to create a dividend portfolio

Dividend investing is a popular strategy for generating passive income and growing your wealth over time. But to maximize the potential returns from your dividend investments, it's important to understand the key dates in the dividend process. In this article, we'll explain the different dates you need to know about, and how they can impact your dividend income. We'll also provide some tips on how to track these dates and manage your investments accordingly. Whether you're a beginner or an experienced dividend investor, this article will provide valuable information to help you get the most out of your dividend investments.

There are 4 main dates to know about, but the most important are the ex-dividend date, which is the last day to qualify for the dividend and the payment date, when the money is paid out to you.

The dividend yield tells you what you can expect to earn per share, and the payout ratio indicates how sustainable those earnings might be.

How do stock dividends work?

Dividends are cash payments that a company will pay to its shareholders at regular intervals (usually quarterly). They are paid out of the company's earnings.

Dividends help companies attract investors and provide you, as an investor, with regular income. Reinvesting the payment received even allows you to purchase more stock in companies that you own for free!

The dates

Companies pay dividends regularly, most often quarterly, alongside earnings reports. Here are four important dates you should add to your calendar.

How Dividends Work in the UK - Learn more on how Quarterly & Monthly, Stock, ETF and Mutual Fund Dividends work in the United Kingdom. Payment Ratio and Dividend yield.

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