Dividend investing and building a steady income in a low-interest rate environment

In today's economy, it's no secret that high-interest savings accounts are going the way of the dodo. Not only are these accounts woefully inadequate as dedicated income streams, but they also tend to have stringent minimum balance requirements, high penalties for early withdrawal, and a lot of extra fees. In fact, for many customers, the nominal interest rate you receive on your savings will be far outweighed by the amount of money you pay in overdraft, transfer, and account-keeping fees.
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Thanks in part to ongoing volatility in the global economy, interest rates on savings accounts are at historic lows, with most banks offering a paltry 0-0.25% return on your money. This is a far cry from the interest rates of the past, which were often well into the double digits.

For those who want to keep their money in a traditional bank account, this is understandably frustrating. With interest rates expected to remain at record lows for some time, it’s clear that this once-reliable income stream has become a thing of the past. So, how can you build a steady income stream amid this seemingly never-ending downturn?

The answer is easy, and it’s all about dividends. Dividends are one of the most important tools that investors can use to create a steady income stream. To this end, we've put together the following dividend stock investing guide to help you kickstart your own journey into dividend investing.

What is dividend investing?

Before you can implement a dividend investing strategy, you first need to understand what it means to receive a dividend. Put simply, a dividend is a quarterly or annual payment that a company makes to eligible shareholders out of the profits that it generated from its business activities. The size of that dividend is based on the profitability of the company and is normally denominated in the company’s shares.

Here's a brief example to illustrate the payout nature of a dividend. Let’s say a company, with a market value of $100 per share, pays out a 5% dividend yield on an annual basis. If you own one share of that company, you will receive $5 in annual dividend income. If you own 50 shares, you'd receive $250, and so on.

Unsurprisingly, dividend distribution is heavily influenced by macro and sector-specific conditions. If the equity market is experiencing a downturn, companies may decide to reduce or even eliminate their dividend allocation. The opposite is also true; in a booming market, you’ll often see companies increasing their dividends. This is due to the fact that in a rising market, companies tend to see strong earnings growth. Companies that are unable to maintain a steady cash flow in these conditions may need to take on debt in order to grow, resulting in lower dividends.

This is what makes dividend investing so exciting. Unlike other investment vehicles, dividend investing has a high potential for market-neutral returns. The ability to ride out downturns in the market and still maintain a steady stream of cash flow is an extremely attractive factor for investors.

Getting started with dividend investing

There are two ways to build a portfolio of dividend investments, the first is to buy shares in individual companies and the second is to invest in one or more dividend-focused exchange-traded funds (ETFs).

If you prefer the former, you'll need to take a closer look at each company's operating expenses to determine how much cash it's likely to generate in a given year. You can also use the dividend payout ratio to determine a company’s ability to continue to pay dividends in the future. Generally, you should target companies with a dividend payout ratio in the 30-50% range. While higher ratios are not necessarily a bad thing, companies with dividend payout ratios above 50% are unlikely to be able to sustain their current payout in the future.

Alternatively, if you're looking for a safer dividend investing strategy, you can invest in dividend-focused ETFs. These ETFs typically contain a diversified basket of the best dividend-paying stocks on the market. If you want to further reduce your fee basis low, look out for ETFs that are passively managed. This means the fund manager is not responsible for discretionary investment decisions; the fund simply buys and holds dividend-paying stocks in its portfolio.

The bottom line

Banks used to offer the best interest rates in the market. These days, however, the picture is very different. The abysmal state of bank account interest rates is a good illustration of how dividends have become the new market leader when it comes to generating a yield on your money.

Remember, the goal of a dividend investing strategy is to create a steady stream of income while preserving your underlying capital. If you're building your portfolio around high-growth assets rather than stable dividend payers, you run the risk of seeing your dividends shrink or even disappear during a market slump.

About Boris Dzhingarov

Boris Dzhingarov graduated UNWE with a major in marketing. He is the CEO of ESBO ltd brand mentioning agency. He writes for several online sites such as Tech.co, Semrush.com, Tweakyourbiz.com, Socialnomics.net. Boris is the founder of MonetaryLibrary.com and cryptoext.com.

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