Perhaps one of the most common mistakes income-oriented investors make is filtering for companies which carry higher than average yields at any given point in time.
I have been an advocate for choosing companies that provide investors with growing dividends over time when compared to companies offering short-term yields which may be higher than sector average, for obvious reasons.
Firms which are able to consistently raise their dividend over time will provide higher average long-term yields, which income investors seek in retirement.
A company that is able to raise its dividend distribution by 7% per year (and there are plenty of examples out there) will double its dividend distribution approximately every decade, making a multi-decade investment in such a company a very wise play.
Indeed, many investors who hold high dividend growth firms for 30 years or more experience annual dividends in excess of their initial investment - a feat which cannot be understated for those who rely on little in the way of pension income or government retirement benefits when the time comes.
One exchange traded fund (ETF) which focuses on profitability in addition to yield is the Schwab U.S. Dividend Equity Index ETF(SCHD). This ETF picks companies which have higher than average yields (removing REITs) and includes only those which score highly on key profitability metrics such as return on equity (ROE), cash flow/debt, and dividend growth (my personal favorite).
For dividend investors seeking a solid ETF with rock-bottom fees (this ETF has a 0.07% expense ratio), take a deeper look at the Schwab U.S. Dividend Equity Index ETF.
Invest wisely, my friends.
