Choosing dividend stocks: an investment strategy to maximize returns

Choosing Good Dividend Stocks Is Half the Success

Dividend investing is not just about receiving dividends. The choice of stocks can significantly impact your returns. To achieve stable cash flow over the long term, you need to analyze a company’s financial health, dividend history, growth potential, and other factors comprehensively.

The first key point in selecting dividend stocks is dividend yield. It indicates the ratio of dividends to the current stock price, but a high yield is not necessarily a good investment. Conversely, an abnormally high yield may signal financial deterioration or a sharp decline in stock price, so caution is advised. A stable company offering an appropriate dividend yield is the true gem.

The second point is to look at dividend growth rate. Companies that consistently increase dividends year after year demonstrate both stability and growth potential. Especially, ‘dividend aristocrats’ that have raised dividends for many consecutive years are highly trusted by investors. Such companies can also be expected to see stock price appreciation over the long term.

Third, analyzing financial soundness is essential. Companies with low debt ratios and steady cash flow are more likely to pay dividends reliably. You should check profitability and liquidity, and assess the sustainability of future dividends.

Opportunities and Realities of the U.S. Dividend Market

The U.S. stock market is the largest and most transparent in the world. Leading global companies are listed here, most maintaining stable dividend policies. High liquidity and abundant information disclosure enable investors to make rational decisions.

There are various ways to invest in U.S. dividend stocks. Besides direct trading of individual stocks, you can diversify through financial products like ETFs(Exchange-Traded Funds) or REITs(Real Estate Investment Trusts). This approach reduces individual company risk while providing continuous dividend income.

Notable Dividend Stocks

Coca-Cola(KO) is a representative U.S. dividend stock that has increased dividends for over 60 years. It offers a dividend yield of over 3% and maintains stable performance thanks to its strong brand power. It is an attractive choice for long-term investors.

Verizon(VZ) is a major U.S. telecom company boasting a high dividend yield of about 6.8%. It has increased dividends for over 20 years and is leading the development of 5G technology. However, increased capital expenditure due to intensified competition in the telecom industry is a long-term challenge.

Realty Income(O) is a REIT investing in commercial real estate. It pays monthly dividends, with an annual yield of 5.35%. Its diversified global real estate portfolio and stable operational performance drive continuous growth. Risks include interest rate fluctuations and changes in the real estate market.

Among domestic stocks, Lotte Holdings(004990) is noteworthy. It has an expected dividend yield of 7% and is pushing for management innovation. HD Hyundai Marine & Shipbuilding(443060) offers about 3.2% dividend yield from its ship after-sales service business and plans to switch to quarterly dividends starting in 2025. Emart(139480) maintains a stable dividend policy but recorded its first annual loss in 2024, making performance improvement a challenge.

Two Approaches to Dividend Stock Investment Strategies

Long-term holding strategy is the core of dividend investing. Receiving dividends steadily and reinvesting them creates compound effects. Buying additional shares with dividends each year increases your holdings over time, and ultimately, dividend income grows exponentially.

Short-term trading strategy involves exploiting stock price movements around the ex-dividend date. Buying stocks just before dividends are paid to receive the dividend, then selling afterward, or buying more after a price drop post-dividend, are common tactics. However, to be profitable, the gains must exceed the dividend amount, making market analysis essential.

Portfolio Construction and Risk Management

A dividend stock portfolio should be composed of high-quality stocks across various industries to minimize risk. Using ETFs allows for diversified investment in dozens of dividend stocks at once, reducing the burden of selecting individual stocks while pursuing stable returns.

When investing in dividend stocks, you must also consider exchange rate risk. A strengthening Korean won can reduce the real value of dollar-denominated dividends. Additionally, double taxation issues between the U.S. and Korea should be considered. If annual overseas stock income exceeds 2.5 million won, a 22% capital gains tax and 15% dividend income tax apply. If interest and dividend income surpass 20 million won, you must file a comprehensive income tax return by next May.

Common Pitfalls in Choosing Dividend Stocks

A high dividend yield is not always a good sign. Sometimes, due to structural problems, a company’s stock price falls, making the yield appear higher. Therefore, it is crucial to analyze the company’s long-term financial health and growth prospects comprehensively.

Macroeconomic conditions also significantly impact dividend investing. During interest rate hikes, dividend stocks may become less attractive, and during economic downturns, dividend cuts may occur. Past dividend performance does not guarantee future results, so evaluating current company conditions and market environment together is essential.

Conclusion: Careful Selection Determines Returns

Choosing dividend stocks is not just about seeking high yields. It involves a comprehensive assessment of dividend history, financial health, and growth potential to select stocks that can provide stable cash flow over the long term. Thanks to transparent information disclosure and high liquidity, U.S. dividend stocks are popular among global investors.

All investment decisions should be based on thorough research and analysis. The same applies to dividend stocks. Study various stocks, align your choices with your investment goals and risk tolerance, and build a stable, profitable portfolio.