Last updated on July 2nd, 2021 at 04:02 pm
Many stock market investors invest in dividend stock to enjoy the benefits of a steady income whilst using the opportunity to reinvest the very amount to fund the purchase of the additional shares of stock. Investing in dividend stocks is one of the major passive income sources and in the long run, it offers substantial income for anyone willing to invest.
Generally, the consensus is that any company offering dividends to the public is considered financially stable which creates a positive impact on the stock prices and puts it on course for growth. These companies tend to remain stable and any fluctuations in the stock prices are merely marginal.
It’s no surprise that many young people are looking to generate wealth and build a steady income source by investing in dividend-paying stocks. However, not all new investors fully understand the concept of investing in dividend stocks.
We here look into the aspect of how dividends work and how dividend stocks can add an income stream to your bank account.
Tips to Invest in Dividend Stocks
First things first, you need to know that investing in dividend stocks isn’t all about simply looking for the highest yields and putting your money into it. You should not only rely on a single asset class and instead look to invest in the best investment options like Dividend ETFs or dividend-focused mutual funds. We here look at both of these in brief down below:
Buying Dividend ETFs
Dividend Exchange-traded funds (ETFs) are quite similar to mutual funds except for the fact that they are traded on exchanges. ETFs have transparency about them which helps to assure the investors about their reliability. Add to it the fact that they are flexible in nature, they have become a major attraction for investors these days. It’s a great investment option for anyone who is looking to start off their journey into the investment world.
They tend to be a straightforward hassle-free option as they offer a regular dividend and also provide instant diversification to the user alongside the safety of payout. The major thing about dividend stocks is that you don’t need to rely on a single stock to get your dividends as a fund made up of dozens of stocks will be there to offer you a steady stream of return. That being said even if some of the stocks cut back their dividends, your ETFs combined of dozens of stocks will negate any such impact.
How to Buy a Dividend ETF?
You need to start by finding a list of dividend stocks that are only invested in stocks not bonds. Once you finalize the list then you can check the following parameters to find out more about it:
- Dividend Yield: Dividend yield looks at how a company pays out dividends each year. This is expressed in terms of percentage relative to its share price.
- Time Span: Select a marker of 5 years or higher. Anything matching these criteria is better.
- Expense Ratio: It is one of the important markers when going for dividend ETFs. Look or the lower range in this ratio.
- Stock Size: Dividend ETFs can be invested in companies with large, small, and medium-capitalization. The large caps are much safer and less volatile to invest in while the small caps are the riskiest of the lot.
Based on the above-mentioned criteria you can decide on the best suited Dividend ETFs for your investment.
Buying Individual Dividend-Paying Stocks
Having talked about Dividend ETFs above we are here now to talk about individual Dividend-paying stocks. These are complicated in nature and require you to be hands-on with your approach. You need to analyze the company and the industry before you can determine whether you should invest in the dividend or not. You will also be looking at a portfolio of the stock market so you need to add a bit of caution whilst going for industry analysis.
How to Buy a Dividend Stock?
You should start first by looking for stocks that pay dividends. Once you have finished analyzing the company you can then start your investment. Look to invest in a healthy company as it will provide a steady stream of dividends for years to come. To gain assurance and surety before investing, you can seek answers for some of the basic financial parameters like:
- Where does the company stand competitively in the market?
- Is the balance sheet of the company strong enough?
- Is the company stable on the market?
- How good is the company’s management?
- Are there any strong indications of the company’s future growth?
The next thing is you need to consider the payout ratio which can be calculated in terms of income paid by the company in the form of dividends. The lower the ratio, the safer is to invest in dividends as the possibility of dividend growth over a period of time is fairly good. With thorough research and analysis, you can find yourself a good company to invest in dividend stocks.
When you start your journey, don’t focus on the highest dividend yields but look for consistent yields over a period of time. Look to invest in dividend stocks that give you good consistent returns for longer hauls.