As part of a sustainable personal finance strategy, one must look for opportunities to establish profitable passive income streams. While not a completely hands off source of income, dividend investing does not necessarily require a lot of time spent by even the best investor.
A carefully built portfolio of stocks has the potential to provide years and years of solid income growth, with little work required by the investor. So what exactly does dividend investing mean and how can you get started?
What are Dividends?
A dividend is the distribution of a portion of a company’s earnings. In order to receive a dividend payment from a company, one must be considered a shareholder of that organization. An investor can be considered a shareholder of a company by owning as little as 1 share of stock.
Distributions of company earnings are usually proposed and approved by the board of directors of the organization. Most companies declare a dividend each quarter, although there are some organizations that pay monthly and a few that pay annually. These quarterly, monthly, or annual payments are usually paid in the form of cash or additional stock if the shareholder chooses that option.
Most stocks that pay dividends come from companies that are considered more secure and stable. These types of organizations are no longer in the “growth” stage of their business cycle. As a way to keep shareholders interested and compete with high growth stocks, they offer dividend payments as a way to pass along profits to shareholders. Younger companies, on the other hand, tend to use their earnings to grow the organization.
Why start Dividend Investing?
As mentioned earlier, dividend investing is one of the best ways to build personal wealth. There are plenty of reasons why one may want to consider becoming a shareholder in stable companies that pass along company earnings to its shareholders. Here are 3 reasons why you may want to start dividend investing.
- Consistent Income – Generally speaking, this type of income stream is not subject to market fluctuations, unlike other investments. Investors who focus only on capital gains on the other hand are subject to both bull and bear markets. As long as the company remains on solid financial ground, the dividend is usually a safe bet in uncertain times.
- Higher Return – Dividend investing offers a much more competitive return on investment in a low interest rate environment. For example, at the time of this writing, Intel Corp. offered a 3.40% dividend yield. Meanwhile, a 12-month certificate of deposit (CD) is returning about 1%. While investing in a stock carries added risks compared to a CD, they offer a much better return.
- Compound Interest – You have probably heard about the power of compounding interest? An investor who chooses to reinvest their payments back into more company stock is compounding their earnings. Most companies allow their shareholders the ability to setup a dividend reinvestment plan or DRiP. These plans make it easy on the investor as all dividend payments are invested directly back into more stock.
How to Get Started
There are plenty ways to get started with dividend investing. Once you have developed a plan and investing strategy, there are numerous ways to buy stock. The most common method of buying stocks is to open up an account with an online discount broker. For about $5 – $10 (USD) per trade, an investor can open an account and have access to purchase hundreds of dividend stocks.
Note – There are numerous investment strategies used to make stock selections. If you are just starting out, make sure to educate yourself on the market and understand what you are doing before you invest your first dollar.
Final Thoughts
There are plenty of reasons why dividend investing can play an important role when it comes to personal finance. Not only does this strategy help investors build personal wealth, it offers the potential for a higher return on investment compared to products like CD’s. If implemented properly, dividend investing is a safe strategy that can generally withstand any type of market.
Although I am not solely focused on dividends at this time, I always love seeing dividends appear in my retirement account. I just seems like free money.
@cashflowmantra – Dividends are the best (IMO)! I only wish I would have thought that way 15 years ago.
In this blog you provide plenty of reasons why one may want to consider becoming a shareholder in stable companies that pass along company earnings to its shareholders are very helpful to us.
Typically, dividend investing is popular among retirees and those who want to live on their money and are no longer able to work. Dividend investing is also particular popular among those who prefer solid and true, old-school blue chip stocks that are considered the “Great American Businesses” or, in today’s world, the “Great Global Businesses”.
I don’t mind dividend investing as a replacement for market investing. It’s a relatively harmless strategy since it involves investing in solid, consistently performing fortune 500 companies.
But as a replacement for CD’s, absolutely not! I could never recommend this to anyone I liked. Of course dividend investing will give you higher returns than a CD haha. I don’t think they make a ton of sense for younger people due to the taxes on dividends. See my article for more detailed analysis: http://yourpfpro.com/young-professionals-invest-dividend-stocks/
I think dividends are great in retirement accounts but with non-retirement account don’t you pay regular income tax for them?