If you want to build long-term wealth, investing is one of the best options. To really super-charge your efforts, though, dividend investing can be a great option. With dividend investing, you have the chance to reinvest what you receive in payouts, essentially getting more shares for free. On top of that, later on, your dividends have the potential to become a significant source of income for you.
Dividend investing now can help you build your portfolio faster, and then when you are ready to retire, you can use dividends as income. Not only that, but dividends often receive favored tax status. As of this writing, in both the Canada and the United States, dividend investing comes with tax breaks. Any time you can see tax breaks for your investments, it’s a chance for you to grow your wealth even more efficiently.
But, even if you know that there are benefits to dividend investing, how can you take advantage of these opportunities? Many people think that they need a lot of money to make dividend investing work for them. After all, if a company is paying out 25 cents a share, you aren’t going to see a sizable payout unless you have the capital to buy a large amount of shares.
The good news is that it doesn’t have to be that way. Dividend investing can be done, even if you don’t have a lot of money. Thanks to dollar cost averaging and dividend reinvestment plans, it’s possible for you to start investing now, no matter how much (or how little) money you have.
Start With a Dividend Index Fund
When you have a small amount of cash, you aren’t likely to be able to buy a lot of shares of solid dividend stocks. This is where indexing can help you. Investing in an index fund gives you instant diversity, there are usually low costs, and you can take advantage of a general trend for the market as a whole to rise over time, in spite of short-term losses due to volatility.
A dividend index fund is one that follows a variety of dividend paying investments. You can choose from high-yield funds, aristocrat funds, or funds filled with dividend stocks from different countries. Most online discount brokerages offer access to dividend index funds. Not only that, but you can usually buy fractional shares if you set up an automatic investment plan.
The ability to buy a portion of a share of a dividend fund is very helpful to the beginning dividend investor of limited means. You can set up a plan that deducts $100 from your account each month and uses to purchase as many shares as possible at the current market price. So, if a share of the dividend investment fund costs $75, your $100 can buy you 1.25 shares. The next month, your $100 buys however many shares it can, and you keep growing your portfolio.
Dividend index fund shares, purchased using an automatic investment plan, is one of the best ways to start dividend investing when you don’t have money.
Automatically Reinvest Your Dividends
A dividend index fund will result in regular payouts of dividends to your account. One of the best things you can do is give your discount broker’s automatic investment plan the ability to automatically reinvest your dividends. Whatever dividends you receive will go toward buying more fractional shares of your fund.
As you continue to use dollar cost averaging to buy shares, and as your automatic reinvestment adds more shares over time, your dividend payouts will get bigger. And, as your payouts get bigger, you will be able to buy more shares with your dividend reinvestment. You can see how the cycle feeds on itself and continues to grow your portfolio.
Over time, as your income increases, you can put more money toward buying dividend investments. You can sell some of your fund shares to purchase individual equities, or diversify into REITs. As you progress, it’s possible to change up your strategy, slowing continuing to build your portfolio and your nest egg.
The most important thing is that you start as early as you can so that you have time on your side. With the accessibility of investments, and with the different options you have now, it’s easier than ever to start investing in dividends, even if you don’t have a lot of money.