Understanding Dividend Stocks and How to Invest

how to invest in dividend stocks
how to invest in dividend stocks

Are you an investor who wants an investment with a regular income? Search no further, dividend stocks are here for your investing pleasure. We will show you exactly how to invest in them.

What are Dividend Stocks?

Dividend stocks are a type of stock in which its earnings are gotten on a regular basis.

In other words, every divided stock you own gives you a part of the company’s earnings.

It is likened to a source of passive income. Well, its yield is relatively low but it is understandable because it has low investment risk.

Since they are less unstable, they help an investor diversify his portfolio and reduce risk.

Misconceptions of Dividend Stock

1. High yield is Key

This is one of the biggest mistakes investors make thinking that a high yield investment is a good option.

They argue that since dividend stocks pay a small yield, it is a bad investment choice.

A dividend is a percentage of a company’s earnings that is not re-invested. Some companies who pay high earnings either do not have a more profitable re-investment option or do not have a clear vision.

2. Dividend Stocks are Boring

If you can minimize your love for high yield, you would find out that dividend stocks are very interesting investments.
It has high dividend growth metrics. meaning there is a high potential for increased earnings in the future.

How to Invest in Dividend Stocks

We will categorize how to invest in dividend stocks into two;

Investing in dividend stocks through ETFs

ETF stands for exchange-traded funds.

Dividend ETFs are an easy and straightforward investing source that offers a regular dividend.

Apparently, it includes lots of dividend stocks, which provides diversifications that are equated to safety.

Diversification of a portfolio is a safety measure in investing. Even if a few stocks have a low dividend yield, it will not affect the overall dividend so much.

Before investing in stocks, consider if they are safe payout investments.

Read Also: What are the Types of Brokers and Brokering Services?

How to buy/invest in a dividend stock ETF

1. Find a diversified dividend ETF

You can find a dividend ETF by searching a stockbrokers’ website.

2. Analyze the ETF

Make sure you invest the ETF in stocks, otherwise called equity, not in bonds. In addition, you will check the following;

  • The dividend yield: This is expressed as a percentage of how much a company pays out in dividends relative to its share price.
  • Returns: Check the five years returns. See if it is progressing or retrogressing.
  • ETF expenses: This includes the ETFs annual fees, ROI, we advise you to invest in ones with an expense ratio of less than 0.5%.
  • Stock size: Investments can be either in larger capitalization, medium, or low capitalization companies. But, the large-capitalization companies have minimal risk in investments. Small-capitalization companies have the highest risks.

3. Invest in the ETF

Buy an ETF from an online broker. Buying them regularly gives you an advantage called dollar-cost averaging.

Dollar-cost averaging is a strategy of diversifying your stock purchases, buying at regular intervals, and in roughly equal amounts. When it is done properly, it has a significant benefit for your portfolio.

This is because dollar-cost averaging reduces your purchase price over time and helps ensure that you are not investing all your money at high prices.

Investing in Individual Dividend Stocks

This takes time and efforts especially when you intend on building a portfolio in an individual dividend stock. But, you have the tendency to get a higher dividend than the ETF.

How to buy

1. Find a Dividend-paying stock

Check that out on financial websites and in online brokers websites.

2. Evaluate the stock

Compare the dividend yield of that company to those of similar companies. If theirs is much higher, it can be no good, ensure the safety of your investment by carrying out additional research on the company.

Find out the percentage of the company’s income that is used as a dividend. If a higher percentage is going to dividends, the company could be running into debt in no distant time.

3. Decide on how much stock to buy

Individual stocks require diversification, so, you will determine how much of each stock to buy.

The ideology behind this is to buy less of higher-risk stocks and more of lesser risk stocks.

The safety of your stocks should be your priority. Stocks with yields over 4% should be carefully checked, whereas those with a dividend yield over 10% is highly risky and should be traded cautiously.

Before investing, check the dividend yield. Know the risk tolerable by you and don’t forget to diversify your portfolio.

Tips for Investing in Dividend Stocks

According to Investopedia, here are the tips for how to invest in dividend stocks;

1. Have a low return/yield expectation
2. Don’t buy dividend stocks from companies with a high percentage of debt. Check the debt-to-equity ratio to determine if the company is financing using more equity or debt.
3. Check the heath of the Industry: For example, buying a dividend stock in the oi and gas industry at the moment is not a wise investment because of the fall in oil price and subsequently share price.

If you are sure to invest in a dividend stock, look for companies that their earnings are increasing. Look for those with strong cash flow, a low debt-to-equity ratio, and industrial strength.
When you find a stock or stocks that meet these criteria, consider setting up a dividend investment and reinvestment plan.

Do you have any questions, talk to us in the comment box.

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