How to Invest in Dividend Stocks

How to Invest in Dividend Stocks
If you’re thinking about establishing an investment portfolio, learning how to invest in dividend stocks can put you on the path to building long-term wealth. That’s because dividend stocks consistently distribute payments to investors, earning them passive income regularly. It can be that easy to generate a steady dividend income stream, but first, here are a few things you should know.
  • Not all stocks make dividend payments. Before you buy stocks, you should do your research because not every stock yields dividends. Look for publicly traded companies that pay a portion of their earnings to their investors. Those companies that opt to share their profits with eligible stockholders through dividends are the ones you may want to invest in for consistent payouts over a long period.
  • Dividend stocks usually pay quarterly. Most dividend stocks produce a set amount and distribute it each quarter. However, some companies may follow other schedules (monthly or annually) or increase their payout amount over time.
  • Dividends are not guaranteed. Depending on financial and economic factors, a company can decide whether to reduce or eliminate dividends. Dividend growth varies and is not always consistent. This strategy requires a decent level of risk tolerance.
To help you further understand how to invest in dividend stocks, let’s take a closer look at what they are and how they work.

What Are Dividend Stocks?

As you gain more insight into dividend stocks, you should understand what a dividend is. Simply put, a dividend is a scheduled payout taken from a portion of a company’s profits and distributed as an equal amount per share to investors who own stock in said company. You can think of it as gaining a bonus for investing in that company. Dividend stocks, therefore, provide investors asset-building opportunities to earn income, even while they sleep. Mutual funds are most well-known for this format. As an investor of a dividend-paying stock, you can expect to receive monthly, quarterly, or annual yields, depending on when the company chooses to issue payments. Then you can accept your share as cash deposited directly into your brokerage account. While cash dividends are the most common type of payout, there are other ways a company can pay its shareholders.
  • Stock dividends. Some companies pay their investors more shares of stock.
  • Dividend Reinvestment Programs (DRIPS). This option allows investors to reinvest dividends into the company’s stock.
  • Special dividends. In some cases, companies may make a significant, one-time payment to distribute strong earnings accumulated over several years.
  • Preferred dividends. These dividends are for owners of preferred stock, which is slightly different from common stock. Preferred stocks act more like bonds than stocks, meaning the payouts are generally at a fixed rate.

What Is the Dividend Yield?

In addition to knowing what a regular dividend is, you should pay attention to the dividend yield. Usually expressed as a percentage, the dividend yield is a financial ratio that determines how much money you earn for each dollar invested. You can calculate dividend yields by taking a company’s annual dividend per share and dividing that by its current stock price. Now that you know the formula for figuring out the dividend yield, you may notice that the yield and stock price are proportional. When one increases, the other goes down. With that in mind, here are some more points to note regarding the dividend yield:
  • Stocks with high dividend yields do not necessarily equal great investments. Because they’re inversely related, high yields could be the result of a decreased stock price. Plus, if the share price of a stock declines, the payouts for that stock become unsustainable.
  • New, small businesses may not have the capacity to pay high dividend yields like the more established companies.
  • Dividend yields are different from dividend payout ratios. The former refers to the rate of return of cash dividends to shareholders, while the payout ratio reflects a company’s cash flow in terms of how much of its net profits go toward dividends.

Is it Smart to Invest in Dividends?

Diversifying your portfolio with dividend stocks may require a lot of time and effort to identify suitable investments for your mix; however, many stockholders find it’s worth it. Initial investment time and effort may be required to identify and research the best dividend-paying stocks; however, regular monitoring and periodic rebalancing are typically all that is needed to maintain an appropriately diversified dividend stock portfolio. Once you perform your due diligence, you should be able to determine which companies have dividend yields between 2 and 5 percent and no more than 10 percent. Then, you can begin pinpointing which companies are in financial trouble and which ones demonstrate an excellent investment. Once you have a solid understanding of the different types of dividend-paying stocks and the associated risks, you can begin to craft an investment strategy. Investment choices can be tailored to meet specific needs and goals. Some investors may prefer to build a portfolio of highyield, lowrisk stocks, while others may be more comfortable with a mix of growth and income stocks. No matter what your investment strategy, always remember to do your homework and stay informed about the companies in which you are investing. Investment advice should be tailored to each individual investor. Always consult with a financial advisor before making any investment decisions. As far as sound investing strategies go, you add stability to your portfolio by purchasing shares in established corporations with a history of dividend payments. And since dividends stem from a company’s profits, that’s a sign of solid financial health. Finally, you gain steady income at least once a year, maybe four times, when investing in dividend stocks.

The Dividend Aristocrats Index

For those who want or need to play it safe when it comes to investing in dividend stocks, there are the S&P 500 Dividend Aristocrats. This market index affords individuals, including investors on fixed incomes, the opportunity to invest in select large companies from the S&P 500. ABC Corporation is one such company. The S&P 500 Dividend Aristocrats are a select group of S&P 500 companies that have increased their dividends every year for at least 25 consecutive years. These vetted companies are supposed to offer:
  • Reliable dividend payments;
  • High liquidity;
  • More diversification than high-yield dividend indexes; and
  • Flexible investment options.

How to Evaluate Dividend Stocks

Besides examining a stock’s dividend yield and payout ratio, you can evaluate dividend stocks and decide which ones are investment-worthy using several other measurable ways. The dividends to investors is the amount of cash or stock that is paid out to shareholders. This is typically expressed as a percentage of the company‘s earnings or net worth. The dividend to investors can be paid out in cash or stock, and it can be paid out on a regular basis or as a onetime payment.
  • The current dividend per share (DPS) is each shareholder’s quarterly cash payment for each share owned. Mutual fund companies typically announce the DPS and payout date in advance. The payout date is when the mutual fund company will distribute the dividend to shareholders. The distribution will usually be in the form of cash, but it can also be in the form of stock or another security.
  • Indicated dividend refers to the projected annual dividend for the next year, assuming quarterly payouts will be the same as the current year.
  • Earnings per share (EPS) indicate the portion of a company’s profits allocated to each share of stock. Brokerage firm Edward Jones recommends that you look for companies with EPS growth rates of at least 15% per year.
  • The price-to-earnings ratio (P/E) reveals how much money to invest to receive a dollar of the company’s earnings. Brokerage fees and other costs must be subtracted to get to the net earnings that are attributable to the common stock.
  • Quick ratio determines a company’s liquidity. Distribution rate is the percentage of a company‘s earnings paid out to shareholders in the form of dividends. The higher the percentage, the more likely the company can afford to make payouts. The dividend yield is the annual dividend payout divided by the stock‘s price.
  • The debt covering ratio displays a company’s ability to finance its current liabilities. A debt covering ratio of less than 1.0 suggests the company has less than enough funds to cover its current liabilities.
  • Return on equity (ROE) indicates how well a company can turn an investor’s money into profit.
  • Net margin is the ratio of net profits to net revenues. The higher the net margin, the less competition a company has and the more demand for its product.
  • Cash flow is the difference in a company’s quarterly income versus its payout. Cash distribution is the payout of a companys dividends to its shareholders.

Get Started

You’re almost on your way to building wealth through dividend investing. To help you get started, here are some steps you can take to purchase your first dividend stock:
  1. Research stocks on your online broker’s website or legitimate financial sites. We can help you learn more about which publicly traded companies pay dividends. Property Investment Trusts (REITs) also typically distribute dividends to their shareholders.
  2. Evaluate and compare the stock’s important numbers. You can use our tools to examine key information about a stock, such as its dividend yield, payout ratio, ROE, etc., and make a proper assessment about which one to purchase.
  3. Determine how many shares of stock to purchase by considering diversification and safety of its dividend. We also offer assistance in planning your investments, so you have a well-balanced portfolio. Distribution planning is an important part of this process, and our advisors can help you choose the right products to fit your needs.
Our advisors use the latest technology in the industry to provide you with the most accurate information and help you stay up-to-date on the latest products. You can trust our advisors to provide you with the best advice for your unique needs. We take the time to understand your specific situation and recommend the products that will work best for you. Industry trends, new products and technology, and your specific needs are all factors we consider when recommending a product. Industrial properties are unique, and we take the time to learn about your specific requirements in order to recommend the most effective solution for you. For more help with investing in stocks and personal finance in general, Shiirs is your best resource. We provide a wealth of helpful financial information and tools to help you meet your personal finance goals. Sign up for Shiirs today!