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How to Invest in Dividend-Paying Stocks: A Bird’s Eye View

Written by Aiden White

September 30, 2020

The benefits of investing in dividend-paying stocks are immense.

First, it helps you to get a steady source of income through dividends. You can use this money to fulfill your various financial requirements. You can use it to reduce credit card debt and walk toward a beautiful debt-free life. You can use it to pay your insurance premium and keep your family protected. And of course, you can use the money to boost your emergency fund. The choice is yours.

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Secondly, dividend-paying stocks are often strong companies with a promising financial future. So, you can expect that the price of these stocks will increase over time, and help you get good returns when you eventually decide to sell them.

However, there is one question. How should you invest in dividend-paying stocks? A pertinent question of any investor. Let’s find out in this post.

How should you invest in dividend-paying stocks?

Dividend-paying stocks are not as volatile as other stocks. So, investors have less risk. They can get a chance to build a diversified portfolio.

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There are two ways to invest in dividend-paying stocks. Let’s discuss them briefly.

(i) You can buy dividend stocks through exchange-traded funds (ETFs)

Many people say that dividend ETFs are the best solution when it comes to investing in stocks that give payouts every quarter.

A dividend ETF consists of several dividend stocks. You can get a diversified portfolio with more safety when it comes to payout. For instance, if a fund’s stock reduces the dividend, the overall effect will be negligible on the overall fund’s dividend.

Here’s how you can buy dividend stocks through an ETF fund.

Keep a watch out for dividend ETFs

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Open your broker’s website and find out if there is any dividend ETF. A good move is to choose a low-cost ETF fund that consists of dividend stocks from the S&P 500 stock index. You’ll get a diversified package of stocks. 

Evaluate and understand the ETF

There are various things that you need to evaluate. For instance, you need to check if the ETF fund invests in stocks.

Next, evaluate the companies where the ETF fund invests. Usually, an ETF fund invests in all kinds of companies – small caps, mid-caps, and large caps. Choose an ETF fund that invests mostly in large-cap companies instead of small-cap companies. Large-cap companies are the safest bet, whereas small-cap companies are risky.

Now, figure out the dividend yield. This is the ultimate thing. How many dividends are companies paying out as dividends to investors? How much are they paying in comparison to their stock price? This is typically listed at your brokerage. It will also be listed in the fund’s prospectus.

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Then, determine the expense ratio. This is nothing but the ETF’s annual fee. You have to pay this fee out of your investments to the fund. So, how much fee do you need to pay? The expense ratio is typically also listed at your brokerage. 

Choose an ETF fund where the expense ratio is 0.50% or less than that.

Purchase the ETF within a few clicks

Once you have made a decision, purchase the ETF through the online broker within a few clicks. The best strategy is to buy the ETF periodically. This popular strategy is called dollar-cost averaging and helps mitigate the up and down risks of the stock market.

(ii) You can buy individual dividend stocks

Here you have to conduct thorough research, follow the stock market trends, and then buy stocks that pay dividends to investors. Here’s how you can do it.

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Look at the stocks that pay dividends

Make a list of the stocks that pay dividends to investors. You can find out those stocks from financial websites and online broker’s websites.

Compare and analyze the stocks

Too much haste is not good when it comes to choosing stocks paying dividends. Compare how much dividends companies are paying to investors. If you find that a company is paying 80% to 100% of its profits to shareholders as dividends, then it’s better to not invest here. There is a great probability that the company is walking toward debt problems as they are distributing the entire profit amongst shareholders.

Decide how many stocks do you wish to buy

As you’re creating a diversified portfolio, it’s necessary to determine how much money you should invest in the dividend stocks. If you have decided to buy ten stocks, then you can buy five dividend stocks and five growth stocks.

Don’t buy risky dividend stocks. Any stock that gives more than a 10 % dividend is risky. And, if any company offers a 10% dividend, then understand that the payout may not be consistent in the future.

A word of wisdom

To find out the best dividend-paying stocks, read articles for getting the latest updates, and knowing the recent trends. Just like you read articles to know the tips to pay off your debt when you owe a massive amount to creditors. Likewise, you should always read financial articles to get an idea of how to pick and invest in the best dividend-paying stocks.

Conclusion

Financially strong companies share their profits with investors through quarterly dividends. These dividends give a regular source of income to investors. Usually, blue-chip companies increase the dividend amount over time. So, investors are happy.

What do you think of dividend-paying stocks? Leave a comment and feel free to share this article with someone who could benefit from it. Thanks for reading and keep on growing your wealth!

 

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Aiden White

Aiden White

Guest Blogger

Aiden White is a financial writer who lives in Dudley, Massachusetts. She started her financial journey in 2015 and has been associated with consolidatecreditcard.org for the last 3 years. Through her writing, she has inspired people to overcome their credit card debt problems and solve their personal finance based queries. Being a debt fighter in her personal life, her goal is to share innovative thoughts and knowledge in the debt communities. Get in touch with her at aidenwhitejoe@gmail.com

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