Well-established and large companies that have a history of dividing their earnings among their shareholders or, more simply, companies that pay out dividends on a regular basis are known as dividend stocks.
Buying dividend stocks proves to be a great choice for many investors because they give a regular income and are quite easy to invest in. The good thing about dividend stocks is that some companies keep on increasing the payouts on a quarterly or yearly basis, which allows investors to build up a nice, stable cash stream for themselves.
Compared to growth stocks, dividend stocks are less volatile, which means they will make your portfolio diverse with low risk. In this article, we will be discussing how you can effectively use your money to invest in dividend stocks, so keep on reading.
There are two main ways through which you can invest in dividend stocks. One is through ETFs (exchange-traded funds), and the other one is through buying individual dividend stocks.
Dividend ETFs offer you a simple and effective way to get exposure to a certain type of investment niche, which is a regularly paying dividend stock in this case.
Dividend ETFs consist of various dividend stocks, which will give you a lot of diversity. This means more safety for your investment. Even if there is a cut in the dividends of some of the fund’s stocks, the overall effect would still remain low. If you are smart enough, you would already know that looking for a safe payout should be anyone’s top priority when making any dividend investment.
Now, we will get into the details of how to actually buy dividend ETFs.
Finding Diverse Dividend ETFs
You can search for dividend ETFs on your broker’s website. Low-cost funds are usually the safest option, which consist of dividend stocks taken from the S&P 500 stock index. This index offers a wide variety of some of the top American companies.
Make sure that you go ahead with a commission-free option so that you do not have to pay a commission every time you buy or sell the ETF.
It is important to make sure that the ETF you choose invests in stocks and not bonds. There are some other things to check too, like the dividend yield. A dividend yield is basically the amount the company pays out on a yearly basis in dividends in contrast to its share price. It’s usually shown as a percentage and the higher it is, the better.
One other thing to analyze is the return period. Usually, anything high is good, but 5 years is a good average. The expense ratio should be considered as well, which is an annual fee that has to be paid out from your investment. The best expense ratio is anywhere below 0.50%. The lower it is, the better.
Stock size also matters a lot when it comes to dividend ETFs. You have a choice of investing in large, medium or small companies. Since larger companies tend to be safer as compared to the risky small ones, it is best if you invest in the big companies.
Buying the ETF
Buying the ETF is pretty simple. Just like you would use an online broker to buy a stock, for ETFs, you have to do exactly the same.
Advantages of Buying ETFs
For individual investors, the biggest and most attractive advantage of buying an ETF is that you just have to buy a single ETF and don’t have to keep in check with many companies. However, if you are going to use the individual dividend approach, that is something you would have to do. In this case, you just have to buy the ETF and keep on adding money to it on a regular basis.
Individual Dividend Stocks
Compared to an ETF, building a portfolio from individual stocks is quite tough and time-consuming, which makes it quite complex. On the bright side, the ability to choose individual stocks based on your liking gives you greater flexibility and allows you to find higher dividends as compared to an ETF.
Like any other decision, you will have to evaluate and analyze the organization, see how safe the dividend is and decide how much you want to buy. Let’s look into how you can actually buy the dividend stock.
Finding a Dividend Stock
There are several financial websites where you can find stocks that pay dividends. You can also check out your broker’s website for dividend-paying stocks.
Analyzing the Company
This is one of the most crucial steps in the buying process. You will need to study and understand the company’s financial statements and other records before making the decision. You need to make sure you choose a company that is reliable and able to sustain and maintain its dividends for the years to come.
Analyzing the Dividend’s Safety
Determining the payout ratio is another important step. The payout ratio is basically the percentage of income that the company pays in the form of dividends. Lower is better in this case because it shows that the dividend is safer and the growth will be faster.
Deciding How Much You Want to Buy
Buying individual stocks means you need diversity, so you will have to decide what percentage of the portfolio goes into each stock. You can equally divide among all stocks; for example, you can put 5% of your portfolio in each stock if you are buying 20 stocks.
Assessing the risk is key here. You should buy fewer riskier ones and more safer stocks.
Safety is key, so when you are buying a dividend, make sure that you don’t jump into buying the high yielding ones because that might not benefit you. The dividend’s safety is more important than the yield.
Advantages of Buying Individual Dividend Stocks
If you like the challenge of choosing and studying reliable stocks and combining them to form a good portfolio, you should go with individual rather than ETF stocks. The former can give you a much higher yield and safety if chosen with the right technique and knowledge.
By investing in the right dividend stocks, you have the opportunity of enjoying a passive stream of income. Invest wisely!