The 4 Rules of Dividend Investing

You've probably heard the story of how Warren Buffett picked up shares of Coca Cola ( KO ) in the late 1980s through Berkshire Hathaway at a split-adjusted price of just $5.48 per share. While the stock has soared since then, what often gets overlooked is that Coke has increased its dividend every year since then at a compound annual rate of 11%. This means that Berkshire now collects an annual dividend of $2.04 per share for a remarkable 37% yield on cost! Dividend stocks can be an excellent way to build long-term wealth. But before you rush out and buy your next high-yielder, there are 4 things you need to consider first:

1. Know the Company's Payout Ratio (Dividends / Net Income), 2. Know the Company's Sustainable Growth Rate (1 - Payout Ratio) x Return on Equity, 3. Know the Company's Dividend Policy and 4. Consider Earnings Momentum. The goal is a steady, market-topping flow of returns through all conditions, and especially during volatile periods like we're seeing lately.

Source: NASDAQ

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