Dividend Stocks & How-To Invest
Dividend stocks are and have been a great way for investors to get a regular income. View our list of high-dividend, low-risk stocks, and learn how you can invest in them.
Are you looking for an investment that offers regular income? Then high-dividend stocks might be the right choice for you!
Dividend stocks distribute a portion of the company’s earnings to its investors regularly. Most dividend stocks that are available will pay investors a set amount each quarter, and the top ones pay their payouts over time, this means investors can easily build an annuity-like income stream.
Dividend stocks can be less volatile than more basic growth stocks, this means they can be a great way to diversify your overall portfolio and reduce your risks.
Invest For Income | Dividend Stocks vs Dividend Funds
The main two ways to invest in dividend stocks are through mutual funds, or by purchasing individual dividend stocks.
Dividend ETF’s or index funds will give access to investors to a selection of dividend stocks all within a single investment. This means that with just one purchase, you can own a full portfolio of dividend stocks. The fund will then pay the dividend payments to you regularly, which you can choose to keep or reinvest. The benefit to this method is that if one stock held by the fund decides to cut or suspend its dividend payment, you can still rely on the income from the others within the fund.
For both dividend funds and dividend stocks, reinvesting your dividends can enhance your return on investment. Dividends often increase the return of a stock or dividend fund by a few percentage points. For example, the total annual return or the S&P 500 has been approximately 2% higher than the index’s annual change in value.
The difference can and will add up. If you have an initial investment of $10,000 that grows at 6% annually for 10 years you would have a value of just over $17,900, compared to over $21,500 if you chose to reinvest.
A good rule of thumb is to invest the bulk of your investment portfolio into index funds, for the reasons given above.
Investing in individual dividend stocks, however, also has its benefits. This however will require more work on the part of you the investor. You will need to research each stock to ensure it fits into your overall portfolio. Investors who choose to invest in individual stocks can build a customized portfolio that might be able to offer higher yields than a dividend fund. Expenses can also be lower when it comes to dividend stocks. Dividend ETFs or index funds will normally charge an annual fee, this is referred to as an expense ratio to investors.
How to invest in dividend stocks
Building your portfolio of individual dividend stocks will take time and effort, but for many, it will be worth it
Here is how you can invest in dividend stocks:
Find a dividend-paying stock
You can search for stocks that pay dividends on various financial websites. (We have included a list of less risky, high dividend-paying stocks in a table below)
Evaluate the stock
To help evaluate a high dividend stock, start by comparing the different dividend yields among similar stocks. If a company’s dividend yield is much higher than other company’s, it could be easy to spot a red flag. At the least, this would highlight the stock so you can do additional research into the company and some further background research into this stock to see how safe the dividend is.
Once you have done this, you can take a look at the stock payout ratio. This will tell you how much of the company’s income is going back towards paying dividends. A payout ratio that is too high can be unsustainable and mean that this stock might be in trouble. Generally, a ratio above 80% means the company is putting a large percentage of its income into paying dividends, in some cases a ratio can be 100% or even more, this means the company will go into debt to pay dividends and is therefore potentially more of a risky investment.
Decide how much stock you want to buy
You will need diversity if you will buy individual stocks. This means you will need to determine what percentage of your portfolio will go into each stock.
For example, if you are buying 20 stocks, you can put 5% of your portfolio in each. However, if the stock is risky, you might want to buy less of this stock and put slightly more money towards safer options.
The top consideration when buying a dividend stock is the safety of its dividend. Yields that are over 4% should be examined in detail, dividend yields over 10% would be definitely in the risky area and we would recommend extreme caution in this area. They can provide large sums of money, however, a rate this high will not be viable long term. As dividend yields rise inversely to the stock price, a higher yield could mean that a stock is being devalued, you would want to do some research on this and why this is happening before going any further.
Top-performing dividend ETFs:
WisdomTree Global ex-U.S. Quality Dividend Growth Fund (DNL)
Performance over 1-Year: 19.8%
Expense Ratio: 0.58%
Annual Dividend Yield: 1.80%
3-Month Average Daily Volume: 19,482
Assets Under Management: $191.2 million
Inception Date: June 16, 2006
First Trust NASDAQ Technology Dividend Index Fund (TDIV)
Performance over 1-Year: 18.9%
Expense Ratio: 0.50%
Annual Dividend Yield: 2.20%
3-Month Average Daily Volume: 108,306
Assets Under Management: $1.3 billion
Inception Date: August 14, 2012
Issuer: First Trust
Invesco S&P 500 Quality ETF (SPHQ)
Performance over 1-Year: 18.0%
Expense Ratio: 0.15%
Annual Dividend Yield: 1.76%
3-Month Average Daily Volume: 933,874
Assets Under Management: $2.1 billion
Inception Date: December 6, 2005