Investing in the best dividend growth stocks can be an excellent source of high return from your investment in the stock market, with a minimum of risk. However, for this, you will need to keep the following things in mind.
Focus on Stock Selection-
The health of the economy, the strength of a sector, and the popularity of industries are all secondary in importance. Ultimately, good stocks make money and bad stocks lose money (at least relatively). Skilled stock selection (especially if you are a long-term investor) is paramount.
We advise you to invest in the stocks of those organizations that have established a long-term record of stability, growth, and profitability. Incidentally, do look at dividend payments of those companies to see whether any reduction in the dividend payments ever happened; it is usually not a good idea to invest in those companies, which have seen a reduction in dividend payments.
Embrace Fundamental Analysis-
Always remember the words of Warren Buffet, “Price is what you pay, value is what you get.” Do not make your decisions after focusing on movements in the price of the stock. Doing this is a little bit like going to the grocery store on a very empty stomach. Your opinion is clouded and you tend to make many bad decisions.
Instead, try to learn a company’s actual value using fundamental analysis. The financial fundamentals are the true drivers of the stock. And to learn the true value, you must study the true drivers.
This sounds almost simplistic, but it is incredible how many people violate this bit of common sense. Try to put blinders on and ignore what is happening to the price of the stock. Focus on the financial fundamentals.
You must have heard from many people ‘no risk, no gain’, but only those risks that are taken prudently result in gains. If you see a treasure in a well and you jump into the well without thinking whether jumping in the well is safe or not and how you will come out from that well, you may gain the treasure, but lose your life.
Many people do not overestimate the return they will achieve from an investment; instead they underestimate the risk they have to endure from an investment. The best way to remedy this tendency is to purposely and deliberately focus on the risks involved in an investment. Like an athlete trying to correct a bad throwing motion, most investors should focus on and even overemphasize their weakness.
An excellent way to emphasize reducing risk is to invest in those organizations which have higher income than dividends, as this policy would be a kind of assurance that if a company sees a downturn, then the dividend will not likely sink. Dividends are the single most useful variable in a policy to “Go Safe.”
Do not become overexcited when you see a surge in the stock market and do not become distraught when you see a fall in the stock market, as the stock market is one of the most erratic markets in existence. One thing you can be certain of when a stock goes up or down wildly, is that the true value of the stock probably changed only a fraction as much.
Instead, have an emergency plan always ready with you that will guide you to take the right decisions at the right times. Remember, market drops are opportunities to buy good companies that are being punished for silly reasons.