Investing in individual stocks may initially seem very complex and time-consuming, especially if you are a novice in the field. However, compared to popular belief, it is not actually that complicated, and if done right, it does not require much time or effort at all. In fact, doing it right means that after conducting your selection analysis and making the actual purchase, you leave your chosen stocks alone for a long time, set them aside, and do not worry about them—just quietly let them do their job and generate returns for you. In the meantime, you can focus on the everyday things that matter more to you: family, friends, hobbies, work, etc. The beauty of investing is precisely that you do not have to constantly attend to it, yet it steadily does its job and gradually builds your wealth.

The fundamental mindset here is also extremely important: the key aspect is to think like a business owner. You should see the purpose in the given company’s business and buy shares in a enterprise you would genuinely want to own long term. If you do not want to be an owner of a great company, then stock buying was not meant for you. However, even in such cases, you still have the opportunity to invest in equities with minimal effort—for instance, through a passive, index-tracking ETF. We have previously written about the advantages of ETFs here: Stocks or ETF? What should you buy?. If you are willing and able to act like a business owner and are an entrepreneurial-minded investor, it is worth keeping a few considerations in mind regarding dividend-focused investing. Obviously, dividends are not the only thing worth paying attention to, but in any case, a company that is capable of paying dividends across long decades while raising them year after year is certainly worth examining from an investor’s perspective.

Companies paying higher dividends are often disfavored by investors these days, as in most countries higher tax rates are attached to them compared to capital gains taxes. Thus, many publicly traded companies do not pay dividends at all, or pay only minimal amounts, choosing instead to resort to stock buybacks to increase shareholder value. Both options can be profitable for the company’s shareholders, but only if the management builds its policy carefully and rationally. Whichever path a public company chooses, it can certainly be inferred that they have the means to finance it, meaning the company is likely profitable. Naturally, this alone is not enough to reach reassuring conclusions about declaring a company suitable for investment, but it can be stated that a consistently loss-making company will not spend money on dividends or share buybacks, as it simply lacks the funds to do so.

Dividends accounted for a significant portion of the total returns realized on U.S. companies over the past century, and good opportunities can still be found today, even though fewer companies pay dividends nowadays compared to previous decades. Here is what to look out for in a company if it pays a dividend and you would be happy to become an owner:

• Dividend history: The company has been paying dividends for a long time, without interruption, and is consistently able to increase them.
• Dividend growth: If it can increase the amount of dividend paid year after year, it demonstrates sustainable growth and a continuous ability to boost profits. This instills confidence in the company’s management and provides greater security that they will manage the business similarly in the future, thereby generating income for you through your share of paid dividends. Last but not least, this is a major advantage over fixed-income securities (bonds), as here the actual payout increases over time, whereas with bonds the annual payout remains fixed until maturity—making a dividend-paying company much more interesting than bonds from an inflation-protection standpoint.
• Dividend yield: The ratio of total dividends paid over the past 12 months relative to the current stock price. The rule of thumb here is generally that companies with a low or moderate dividend yield are the ones on which you can realize higher returns in the long run. Paying out excessively large dividends can paralyze a company’s operations and leave it strapped for resources when it needs them most. Additionally, one must consider whether the company could generate greater value for shareholders by retaining the capital instead of paying it out. Therefore, there is no specific figure above which one can definitively say it will no longer be a good investment; a company might simply be going through a tougher period, allowing you to buy it at a depressed price yielding a higher starting dividend, or it might be paying an unjustifiably high dividend ratio (perhaps to attract new investors), which could ultimately impair the company’s business. In short, your primary focus should not be on the dividend yield relative to the current stock price; thoroughly examining the first two points is far more essential. And once again: a lower dividend yield generally yields higher long-term returns. Somewhere between 2–5% is usually ideal for a well-functioning company that is currently neither overvalued nor undervalued.
• The stock prices of good dividend-paying companies typically fluctuate less and are less volatile compared to the broader stock market. This is because regular and growing dividend payouts provide a steady stream of income for shareholders, making them less inclined to sell during major market downturns—especially if they have held the stock for a long time and the dividend alone already yields a great return on their initial investment. It can be viewed as a form of passive income. Psychologically, it can also be reassuring: even if the paper value drops by 10–20%, it continues to deliver value quarterly, which lightens the emotional burden of enduring a price decline.
• The stock prices of good dividend-paying companies typically rise in tandem with their dividend growth, as the company is profitable and stably increasing its payouts, making it attractive in the eyes of investors.
• Time works in our favor here as well: The longer you hold shares of an excellent dividend-paying company, the higher the profit you can record relative to your original invested capital.
• Low debt ratio: If a company can generate profits without relying on significant debt financing, it is worth examining. Taking a very conservative view, one could even say that the target company should not carry more debt than its total equity. Of course, this ratio can depend on the industry, but it serves well as a rule of thumb, as Lowell Miller nicely explains in his book The Single Best Investment.
• Strong cash flow: In tough times, financially strong and flexible companies can actually grow even stronger. Cash flow must be sufficient to cover both dividend payouts and the investments required for continuous growth and development. Simply put, you should keep an eye out for consistent annual profit growth and an expansion rate of at least 5–10 percent.
• Payout ratio: The ratio of dividends to net income should ideally be below 60%. Since dividends are paid out of profits, earnings must be sufficient for the company to afford the dividend today and still be able to increase it next year (Lowell Miller: The Single Best Investment).
• Credit rating: It pays to restrict your scope to higher-quality companies, aiming for at least a BBB+ credit rating. Managing this conservative criteria simplifies your investment analysis while ensuring you choose a high-quality enterprise (Lowell Miller: The Single Best Investment).
• Quality of corporate management: Numbers and metrics derived from financial indicators provide tangible help in identifying suitable buying opportunities, but what about the quality of the company’s executives? Are they trustworthy? Do they know what they are doing? Are they performing well? Are they allocating capital efficiently? These questions can be harder for a beginner investor to grasp. Nevertheless, it is worth reviewing what kind of news has surfaced about the company in media outlets in the past. What acquisitions has management executed? What issues have arisen around leadership, such as potential fines, penalties, or legal proceedings? If problematic news frequently surrounds a company, you should carefully reconsider your investment, as you may just be inviting unnecessary trouble. Obviously, judging from afar as an outsider which management team might pose a problem is the hardest part to get right.

An example of the compounding effect of dividend growth: If a company pays $1 in dividends in the first year and consistently increases it by 10% each year (because it is profitable), by the 9th year you will have reached a point where it pays double the original dividend amount. Overall, that is not bad at all—if, say, this originally represented a 4% annual yield on your purchase price, by the 9th year it will be over 8%. And it only keeps growing from there—not to mention stock price appreciation, which will likely track this 10% annual dividend growth quite nicely.

In summary, investing in good dividend-paying companies is a great alternative for beginner investors who want to delve a little deeper into the stock market and corporate fundamentals beyond the realm of passive, index-tracking ETFs. Since it is not as complex as other individual stock-selection strategies, it is definitely worth getting acquainted with. A particularly good piece of literature on the subject is Lowell Miller’s book, The Single Best Investment—it is readable, enjoyable, illustrative, filled with easy-to-understand examples, and offers highly useful guidance for dividend-focused investing.