Get Paid to Hold

Dividends are more than just a perk—they're your recurring reward for owning great businesses.

As John D. Rockefeller famously said:

“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

This lesson will show you how to evaluate dividend-paying stocks, avoid yield traps, and use dividends to generate steady, long-term income.

Key Dividend Metrics to Know

1. Dividend Yield: Your Return on Investment

Formula: Dividend Yield = (Annual Dividend ÷ Stock Price) × 100 Example:

Home Depot pays $6.60 per share annually.

At a price of $317.30, the yield is:

(6.60 ÷ 317.30) × 100 = 2.08%

If the stock price rises, the yield drops.

If the stock price falls, the yield rises—but that can be a warning sign. Watch for Yield Traps:

Unusually high yields may reflect a plunging stock price, not a solid income stream.

2. Ex-Dividend Date: Timing Matters

To receive a dividend, you must own the stock before the ex-dividend date.

After the ex-date, the stock price typically drops by the dividend amount.

Example: If Home Depot pays $1.65 per share, the stock price may drop $1.65 after the ex-date.

3. Dividend Payout Ratio: Can They Afford It?

Formula: Payout Ratio = (Dividends Paid ÷ Net Income) × 100

• Under 60% is generally considered sustainable

• 80%+ can be fine for sectors like REITs and utilities, where cash flow is more predictable

A high payout ratio without consistent earnings growth = potential risk

Dividend Growth: The Secret Weapon

1. Growth Rate

Formula: (Current Dividend − Prior Dividend) ÷ Prior Dividend × 100 Example:

A dividend increase from $2.80 to $3.00 =

(0.20 ÷ 2.80) × 100 = 7.14% growth

Steady dividend increases—especially those that beat inflation—can supercharge your long-term returns.

2. Dividend Aristocrats

These are elite companies that have raised their dividends for 25+ consecutive years. There are only 67 of them in the S&P 500.

They’re known for discipline, consistency, and a strong commitment to shareholder returns.

Advanced Dividend Strategies

Reinvesting Dividends (DRIP)

• Automatically purchases more shares

• Harnesses compound growth over time

• Best for long-term investors who don’t need immediate income

Taking the Cash

• Use dividends to buy undervalued stocks during dips

• Or fund real-life needs—vacations, tuition, retirement

Treat it like a no-drama paycheck from your portfolio.

Avoiding Yield Traps

Red Flags:

• Yields above 5% with no earnings growth

• Falling stock prices masking shaky fundamentals

• Payout ratios over 100%—that means they’re paying more than they earn

Smart Move:

Check free cash flow and dividend history. If FCF is declining while payouts rise, that’s not sustainable.

Where to Do Your Homework

• Yahoo Finance – Basic dividend data and history

• Morningstar – Payout ratios, growth trends, and industry comparisons

• Brokerage Platforms – Real-time dividend metrics and alerts

Use these tools to validate what the numbers are telling you.