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Passive income is a popular topic in personal finance/investing because it’s a way to earn money without actively working. If you’re ready to release your inner warrior-investor, dividend stocks may be your next opportunity.
There are many opportunities to earn passive income, but Dividend Investing is one of the best. It’s also easy to Do-it-Yourself.
The first thing you need in order to invest in dividend stocks is open a broker account or use a Dividend Reinvestment Plan or DRIP.
The second thing is to actually buy stocks that pay dividends. Not all companies pay dividends, but some do. The companies not paying dividends are more focused on growth. These reinvest most of surplus money back into the business.
Most of the Blue Chip companies in the US pay dividends and have been paying for a long time. For example, GE, Pepsico, Coca Cola, Disney, Ford Motor, and IBM are among the companies paying dividends.
If you are doing the best you can with your money and have some left to invest, dividend stocks may be a good opportunity for you.
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Who is Dividend Investing for?
You need to have the right outlook in order to invest in dividend stocks. The thinking is that if you’re looking for passive income from dividends, then you’re a long term investor.
Also, you’re an investor who focuses on quality companies. You may also be a bit risk-adverse or just looking to balance the risks among your investments.
Does this sound like you? I know many women are like this. Women tend to be more conservative and risk-adverse investors than men. But, men can benefit from dividend investing too.
A practical example of what a dividend payment can do for YOU.
Looking at AT&T (NYSE:T), just for example, with a dividend yield of around 6% it looks very attractive. It has a long history of increasing it’s dividends, about 30 years. The company is not focus on growth, this is why it pays out the majority of its’ profits.
If you’re looking for passive income from dividends, a company like AT&T should make it to your radar. Let’s say you invest $4,000 in the shares, at 6% dividend yield, you’ll get around $240 in income for the year. That’s $60 per quarter.
So what does $60 every 3 months means for YOU? It can help you pay your car insurance, it can go towards debt payment, towards a vacation fund, It can be reinvested, you get the idea. It all depends on your goals and needs.
Other Popular dividend-paying stocks: Ford, GE, Exxon, Coca Cola, Cisco, Disney, Intel, UPS. You can find more at Dividends.com.
Why Dividend Investing?
There are so many ways to invest your money, why should you be interested in dividends paying stocks?
First, if you’re looking for passive income, dividend investing is a passive income source. You get a Dividend yield for every share you own of the company.
Second, if you are risk-adverse or are concerned with losing money in the stock market, dividends paying companies are generally among the most conservatives.
Third, if you’re looking to build a portfolio for the long term, dividend reinvestments can add to your position. This is specially true if you reinvest the dividends received.
Dividend stocks deliver on providing passive income, being a conservative investment and adding to your financials with reinvestments. If you like all of that, then this investment type may work for you.
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How to Invest in Dividend Stocks
1.Open a Broker Account
You can buy dividend stocks just as you would buy any other stock, using a broker account. Online brokers like TD Waterhouse, E-trade or Charles Schwab are budget friendly options for buying/selling stocks.
The dividends paid by your company go into your broker account and you can withdraw it or reinvest it into more shares. The tax is handled by your broker using Form 1099-Div which you’ll get so that you can report it.
2.Participate in a Dividend Reinvestment Plan or DRIP
A DRIP is a Dividend Reinvestment Plan. These plans have been around for a long time and you can buy some stocks from the list. First you have to join one of this plan and then you can buy shares thru them (Do-it-yourself style)
A DRIP has list of companies whose shares you can buy. The purpose is to allow the small investor to buy in small quantities and also in companies that pay dividends.
DRIPs are a great way to accumulate shares of companies that pay regular dividends. They are also a simple way to test the waters in he stock market with your first share. DRIPs are one of the best way to start learning to invest in stocks.
You’ll have to pay taxes on all dividends distributed to your account. You’ll receive a 1099 Form reporting amounts received.
There are a few different types of DRIPs. A transfer agent who administer a DRIP or companies who offer direct investments to the public. First Share, Computershares, AST Financials and Wells Fargo Shareowners Services are some of the administrators.
3.Invest in Dividends Focused ETFs
Some exchange traded funds or ETFs specialize in dividends paying stocks. The ETF is composed of companies whose shares pay dividends. The main objective for this type of ETF is generating income thru dividends.
The ETF managers make the decisions to reinvest the dividends paid or pay them out in cash to investors. You can buy ETFs thru brokers or mutual fund companies.
The taxes will be reported in your account and you’ll receive the Dividend Tax Form.
Examples of Exchange Traded Funds focusing on dividend income:
- SPDR S&P Dividend ETF
- iShares Select Dividend ETF
- Vanguard High Dividend Yield ETF
- iShares Core High Dividend ETF
- Vanguard Dividend Appreciation ETF
These are only 5 of the ETFs focusing on delivering income using dividends stocks. In addition to these, you can find ETFs specializing in narrower sectors, like real estate or oil and gas. Vanguard, Fidelity and American Century Investments are some of the funds companies where you may buy ETFs.
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What to look for when investing in Dividend Stocks
The Dividend Yield. This is how much in dividends you’re going to get paid for your shares of the stock. For example, if you own 10,000 of a dividend stock paying 6% yield, you’ll get $600 in income. This metric is important for an investor who is looking for a specific amount of income payout.
Dividend Growth. History is not a predictor of the future. However, it helps to evaluate a company’s history of delivering dividends for its shareholders. If you’re evaluating shares for the purpose of dividend income, then you need to look at the history of increasing the payout.
Some company pay the same yield over the years, others have a history of increasing this yield. Not increasing the yield doesn’t necessarily mean something bad. This can mean the company is reinvesting some of the profits.
Payout Ratio. This is how much the company is paying out from earnings. If earnings are $1 per share and the company pays .50 per share in dividends, it means it is paying 50% of earnings out to shareholders. The company may be reinvesting the other 50% back into growing the business.
Other factors you may want to look at are; the company’s overall health, Industry’s prospects, debts outstanding and the payout frequency.
Passive income dividend investing is a way to generate current income for you. Also, investing in dividend stocks for the long term is a conservative way of creating wealth. The dividend payments come in as cash you can use to meet obligations, if that’s your goal.
Remember that you don’t need a lot of money to start investing in dividend stocks. You can buy the shares individually at a broker or via a DRIP or buy an ETF.
Don’t think of your dividend payments as small, they’re actually big no matter the size. Think about each one as part of a bigger picture. You can create a quality collection of dividend paying stocks. If you’re ready to test the waters with dividends, a DRIP is a great way to do it.
Is dividend income one of your long term goals?
Disclaimer: The stocks mentioned in this post are not recommendations. They are used for educational purpose only. Before investing, please do your own research.