Dividend stocks are a great
allure for many investors around. They help to generate a steady passive income
while also offering an opportunity to reinvest the very dividend for additional
stocks of the company. Pair that with the general consensus that any dividend-paying
company is reckoned to be financially stable, it makes complete sense going for
these ones.
Investing in dividend-paying
stock is a great way to make money through investing in stock market and most of the investors are
trying to find their way into it. However, there is still confusion hovering
around how to make money by investing in dividend stocks. We here look to address the issue with our brief
discussion on dividend stocks and tips to invest in it. Read along.
How to Invest in Dividend Stocks?
Investing in dividend stocks
isn’t merely about finding a stock with the highest dividend yield and buying
them out. There’s a lot more to it than that. You can go for the individual
dividend-paying stocks or opt for the exchange-traded funds that contain these
dividend-paying stocks. We’ll here cover both the bases down below.
1) Buying Individual dividend-paying stocks
Buying individual dividend-paying
stock is about finding the companies with dividend-paying stocks and investing
your money into it. It is a time taking an approach as you need to be hands-on
with it. You have to analyze the company and the industry before you can invest
your money into it. It gives you an option to personalize your portfolio and
pick those that are suited to your needs.
We’ll detail the process for
buying a dividend-paying stock down below. Read along.
How to buy a
Dividend Stock?
Since the talk is about the dividend-paying stock you
need to find the stocks or the companies that are offering dividends. Look for
the stats and check whether the companies that are offering the dividends have
a healthy status or not. You can check it by zeroing in their dividend history
and see whether they have been making a steady stream of dividends or not.
Furthermore, you should also have to analyze the company based on financial
parameters. You can do so simply by seeking answers to these following queries:
- What is the
financial stance of the company in comparison to its counterparts?
- Is the
company functioning on a stable note in the market?
- How good is
the management of the company?
- Are the
financial statements of the company strong enough?
- Are there any
strong indicators for the future growth of the company?
- How much can
you invest in the dividend-paying stock?
You can also seek consideration for the payout ratio
which will showcase a good idea about the company. The dividend payout ratio is
calculated in terms of income paid by the company in the form of dividends. If
the ratio is lower, it means that the company is safe to go because of the
possibility of dividend growing over a forthcoming period if fairly good
approach.
The next approach is going for the exchange-traded
dividend funds. Let’s have a look at it.
2) Buying Dividend ETFs
Dividend Exchange Traded Funds
(ETFs) are similar in aspect to mutual funds except for the fact that they are
traded on the exchanges. They are a simple and straightforward option and allow
an investor to avail of the dividend-paying stocks. This one being an exchange-traded
fund is a collection of dozens or multiples of dividend stocks. It is flexible
in nature and offers a good investment option for people who are looking to
start their journey into the investment field.
Dividend ETFs are a hassle-free
option as they allow you the option for diversification and also helps to provide
you a safety bracket. Since it is made up of dozens of dividend stocks, even if
one of your stocks doesn’t perform as expected then other stocks will negate
that impact.
Here’s how you can buy a dividend
ETF.
How to buy a diversified ETF
- Find a
broadly diversified ETF
-
You should
start by finding a broadly diversified ETF. Look for the ones traded on the exchange that comes with the package of different stocks from a host of
companies.
- Analyze the
ETF
-
Merely going
for any dividend based ETF isn’t the right way to do it. You need to analyze
them in order to find the best one. You can calculate the same via these
points:
a)
Dividend Yield: Dividend Yield looks at the
aspect of how much the company is paying out the dividends each year. This is
generally expressed on the percentage basis.
b)
Timespan: This segment
looks at the time span of returns over a time period. It’s preferred if you
look at 5-year returns.
c)
Expense ratio: This is one
of the major markers while analyzing the dividend ETF. Look for the one with
the lower range of expense ratio.
d)
Stock Size: Dividend ETFs
are the pool of dividend-paying stocks from large, mid and small-cap companies.
It is advised that you go for a large-cap based one as these tend to be much
safer and less volatile in nature.
- Buy the ETF
-
Once you have found the ETF and analyzed it accordingly,
you’re good to go for the investment into the ETF’s.
Bottom line
When looking to make money off the dividend stocks, the
first regard should be towards finding a consistent piece rather than the
highest yielding dividend stock. The secret to making money from dividend stock
is to look for the long term, so it’s always advised to find the stocks that give
consistent returns over a period of time. This way you can get constant returns
whilst also seeing your investment grow with time.
