For anyone that is new to dividend investing this post is for you! My goal is provide an overview of what dividend investing is all about and what your next steps should be if you want to get started. This method is generally considered to be a stable method for generating consistent returns over a long period of time.
Day traders and those looking to get rich quick can stop reading here.
First a quick overview of what a dividend stock investing is. Companies that earn profits often distribute those profits to shareholders in the form of a dividend. If you own stock in one such company you can expect to receive a dividend payout in the form of a check or a deposit into your stock trading account. Most dividends are paid quarterly but every once in a while you will come across a stock that pays dividends monthly or annually. The best dividend payers are able to grow their dividend payouts each year because their business and profits are growing.
There are many advantages to dividend investing however its not for everyone. We disagree with those that dislike dividend stocks and choose to be speculators that mostly invest in companies that don’t earn a profit or don’t return their profit to shareholders. That isn’t to say you can’t buy stock in some of those companies (I do) but my long term investment goals are centered on dividend-paying stocks.
The benefits of investing in dividend stocks include the following:
- Better Returns overall – From 1972 to 2010 stocks that paid dividends rose on average 7.2% while those that did not only increased 1.5%.
- Invest in Profitable Companies – Only companies that consistently earn a profit can pay a dividend year after year. By investing in these stocks every investor knows their money is in a company that is dedicated to growing income and returning profits to shareholders. This strategy helps to build wealth for long term investors.
- Passive Income – Companies distribute dividends without the investor having to do a thing. There is research involved in picking stocks and some work to maintain a portfolio but the income stream stays mostly passive.
- Get A Raise – The best dividend payers increase dividends each year which increases passive income. Its like a passive raise.
- Compounding Returns – Reinvested dividends create compounding returns that help to drive the total return up and up.
- Downside Protection – When the market is facing a decline the dividend yield of a stock often provides a bottom in the stock price because investors know that they company will keep paying out that dividend as long as they are earning profits. This often puts a bottom in a stock price because as a stock goes lower the yield goes higher and more investors are attracted to the stock.
Which Stocks Pay Dividends
When I first started moving from speculative investing to buying stocks that payout profits I didn’t know where to start. I had a hard time locating a list of these types of stocks which is what lead me to create this site and many others.
All of the stocks in the Dow Jones Average pay a dividend although some of them are very small. I personally don’t consider a stock a real dividend stock unless it has a yield of 2% or more. Exceptions to that rule may apply when stocks are trading high valuations like they are in 2014. There are lists out there like the dividend aristocrats which include stocks that have increased their dividend for 25+ years. I created a much longer list of stocks that have increased dividends for 20 years.
On this site we built an extensive list of over 1200 stocks that pay dividends. These come in many different forms including REITs and MLPs. The Smart Dividend Investing Guide is a good resource that we put together to help investors understand each type of stock and to become a better dividend investor.
Steps To Get Started
So far we’ve covered what dividend stocks are, why I think they are great and how to find them. Next we need to discuss how to get started.
One thing to clear up first – This site is not a stock picking site. We provide analysis on historical data but we do not make recommendations about which stocks to buy. Our analysis does not make any predictions about what may happen in the future. That is up to every investor to decide for themselves. Consult a financial advisor if you need assistance.
- Open a brokerage account. I use TD Ameritrade and I wrote a detailed post a while back that shows how to open an account with them. After your initial deposit clears you are ready to go.
- Set Goals – There should be an end goal in mind which will help shape which investment strategy is used. A goal could be to create X dollars of passive income 15 years from now. Or a goal could be to generate 7% returns on average for the next 25 years. If you don’t know what your goals should be it is probably a good time to consult a financial advisor.
- Develop a plan. Each investor needs their own plan and strategy. This step could include identifying how much risk to have in the portfolio, what percentage should be invested in stocks, bonds, funds, REITs, MLPs, etc…
- Invest – It’s time to put that plan into action by making investments. All but 2 of the stocks I own pay dividends so it is easy to see where I put my money. (My full portfolio here). This blog and many others like it spend a lot of time analyzing stocks. There is an endless supply of information out there but in the end you have to go with what you know and make your own call. We don’t create buy lists here on this site but we do try to help by providing plenty of research data.
- Manage the portfolio – Investments need maintenance. It does not have to be terribly time consuming but it is important to review the performance of each asset in a portfolio and monitor expectations for the future. I use the dividend income tracker here on this site to keep track of my stocks and dividend income. I use new sites, quarterly reports from each stock I own and professional analysis to keep tabs on what is in my portfolio.