Dividend stocks are a great way to ensure a safe and steady income for years.
Dividend stocks can be a very lucrative long-term investment, but just starting out takes a lot of research. To set yourself up for success, you’ll first want to develop a thorough understanding of how they work and what you can expect from them. So, before you make your first investment, read on to learn some basic terms and procedures.
How Dividend Stocks Work
The best way to explain how dividend stocks work is with an example: if you invest $1000 in 100 shares of a company that pays an annual dividend of $0.40, you can expect $40 per year.
Dividend shares allow you to predict how much you will earn each quarter. Not every company can afford to pay its stockholders every quarter, but if you diversify your portfolio, you can easily calculate what you will be working with.
How to Invest in Dividend Stocks
You can choose to invest either in individual companies that offer dividend payments or in different funds and ETFs.
If you invest in a company, you ideally want to start with one that has a proven track record and continues to raise its dividend payouts.
When investing in a fund, you will have access to various companies. This is a great way to increase your income and eliminate some of the risk, as you won’t have to research each individual company.
High-yield mutual funds hold companies that pay higher dividends, while dividend-appreciation funds will hold companies that have historically increased their payments over time.
Important Facts to Know
Here are some important considerations to keep in mind as well:
- Dividend incomes are subject to taxation if they are held in taxable brokerage accounts. If you want to avoid it, you can consider owning shares through a traditional or a Roth IRA.
- Dividends are not guaranteed, and companies can cut them when they are going through financial difficulties. If a company promises a return on your investment that seems too good to be true, you need to keep an eye out. That may be a sign that the company will cut the payout.
- Diversifying your portfolio and investing in some of the best dividend stocks that are currently available can ensure that you don’t suffer any major losses and that your income is secure.
Why Invest in Dividend Stocks
Finally, here is why you should consider investing in dividend stocks (or why they may not be the best choice for you):
- Dividend stocks are a great source of passive income. They are usually paid out every quarter, so you can expect a steady income for a long time. As long as you invest in the right stocks, you can forget about the investment and just watch the money roll in. Don’t expect a risk-free way to earn a very large amount of money, though. Think of it more as a slow but steady trickle for decades to come.
- Dividend stocks don’t lose their value even if there is a market crash. As such, they are a much safer investment than some other option available to you. Again, the key is in learning all you can about choosing the right stocks to invest in and keeping an eye on them every once in a while.
- You can choose to reinvest your dividend payouts in the same stock. This can help you see a steady return on your investment with dividend compounding. As you won’t have to keep adding any of your own money to the investment, think of it as a free bonus.
- You can also choose to sell your stocks for a profit, rather than just reaping the benefits of the dividends for years or decades. That way, you can earn money twice from the same stock.
- Dividend stocks are much less prone to market volatility. So, you won’t have to spend a lot of time and energy tracking stock movements to ensure your money is safe. You do have to check the market news every once in a while, but a simple “buy and hold” strategy usually works best.
Dividend stocks are a great way to ensure a safe and steady income for years. As long as you choose your stocks carefully (which shouldn’t be a difficult task) and don’t expect to earn thousands of dollars overnight, you can enjoy their yield for a long time.