One of the more interesting ways to get involved with investing, and with creating an income portfolio, is to make use of dividend stocks. Dividend investing can, over time, provide you with regular passive income.
However, it’s important to be careful as a beginner. In many cases, putting together a dividend portfolio means stock picking at some point. You need to make sure that you are careful, and that you understand what you are doing.
What Are Dividend Stocks?
Dividend stocks are fairly straightforward. These are stocks from companies that pay out a portion of their profits to shareholders. The dividend payment, which often comes quarterly (but can come monthly, semi-annually, or annually as well), is on top of any capital gains you experience when you sell at a higher price.
Dividend payments also come even at times when a stock has lost value. Many of the most venerable dividend stocks continued to pay dividends even during the aftermath of the global financial crisis. Realize, though, that companies can choose to cut — or even eliminate — their dividends at any time. However, careful choices can help you stay away from the dividend stocks that are likely to experience cuts.
If you are beginning as a dividend investor, here are 4 tips that can help you on your way:
1. Start With A Dividend Fund
You don’t have to have a ton of money to start investing. Thanks to the ability to buy partial shares with most online brokerages, and thanks to dollar cost averaging, it’s often possible to get started with as little as $25 (although it helps if you invest more).
If you don’t have enough money to effectively get started with individual stocks, or if you uncomfortable with stock picking, start with a dividend fund. You will gain exposure to a variety of dividend investments, receive dividend payments, and buy yourself a little time to become more knowledgeable about investing, and more confident in your abilities.
2. Invest Consistently Over Time
Unless you have tens of thousands of dollars to invest right now, you are not going to see significant cash flow from your dividends. This means that you need to develop consistency over time. Figure out how much you can invest each month, and then use that amount to purchase dividend stocks. Increase the amount you invest as you can. Use Dividend Reinvestment Plans (DRIPs) to automatically reinvest your dividends so that your portfolio grows at a faster rate.
A good dividend portfolio can take seven to 10 years to develop into a decent source of income.
3. Consider Dividend Aristocrats
Dividend aristocrats are those stocks that generally see solid, regular performance. The requirements to be an aristocrat in the world of dividends are different for U.S. stocks and Canadian stocks:
U.S. stocks: For the most part, companies listed as dividend aristocrats must increase their dividend pay out at least once a year for 25 consecutive years. This means that these stocks have not only continued to pay dividends for 25 years, but that they have increased those pay outs each year.
Canadian stocks: In order for a Canadian company to be considered an aristocrat, it must TSX and a constituent of the S&P Canada BMI. It must also have a float-adjusted capitalization of C$300 million. Ordinary cash dividends have to increase every year for five years, but can maintain the same dividend for a maximum of two consecutive years within that period.
Choosing dividend aristocrats makes sense if you are considering stock picking, since you know you are getting solid picks. Consider a mix of U.S. and Canadian stocks for your portfolio.
You can branch out to other stocks as you learn more about choosing stocks for your dividend portfolio.
4. Figure Out Why You are Investing
As you invest in dividend stocks, make sure you know why you are investing. Each addition to your dividend portfolio should have a purpose. Decide what asset allocation works best for you, and will help you reach your goals.
Before you add a dividend stock to your portfolio, think about its place in your plan, and whether it will fit in with your other investments. Also, before you sell an investment, go through the same process. Think about why you are selling. In some cases, it makes sense to cut your losses and move on. In other cases, if the fundamentals of your investment are the same, it might make more sense to hold on and ride out a current rough patch in the market.
With a little careful thought and effort, it is possible to build a successful dividend portfolio. You’ll need to show patience, but if you take the time now to build up your portfolio, the reward is regular passive income down the road.
Good tips. Dividend investing can be good if done properly. A key thing to look out for, especially currently, is not to just set it & forget it as many people are going into dividend payers. That could potentially cause a bubble.
It’s true. With dividend investing becoming much more popular, the bubble potential is rising. You can’t just assume that you you don’t have to do anything with your dividend portfolio.
Who knows what’s going to happen, but dividend stocks in general could take a beating if the tax rate on dividends goes up in 2013. Also, when interest rates begin rising to ‘normal’ levels, all the people who’ve gotten into dividend stocks because their CDs don’t pay anything are going to go back to CDs over time, which may also clobber dividend stocks. Caution is advised, as always!
This is certainly good advice but I would check the dividend cover – the number of times the total dividend can be paid from the published profits.
This should be a healthy number greater than 1.5 (arguably lower for utilities that have guaranteed income and no investment plans).
Consider also preference shares in an iffy market. The preference payout may be a little lower than for ordinary shares but you stand in front of the line if the business goes belly up.
I recently invested in my first dividend stocks. I chose five from the Dividend Aristocrats list. I love the idea of dividend stocks, but I have a lot more to learn about it. I’m also keeping my eye on what the tax treatment of dividends will be in the future, as Kurt pointed out.
Taxes may change this strategy for a lot of investors. I know rates are different in different countries but they should still be considered. We have a few dividend stocks but we don’t base our entire portfolio on them.
One of the more interesting ways to get involved with investing, and with creating an income portfolio, is to make use of dividend stocks. Dividend investing can, over time, provide you with regular passive income.
Dividends can be a great way to supplement your income and overtime can even get to a point where you can live entirely off them.
I guess the only thing you have to worry about is if the stock starts to fall and you start making a capital loss on your investment.
You’re right. You do always have to balance your dividends with possible capital losses. It’s kind of a delicate balance.
Good tips. Dividend investing can be good if done properly. A key thing to look out for, especially currently, is not to just set it & forget it as many people are going into dividend payers. That could potentially cause a bubble.
It’s true. With dividend investing becoming much more popular, the bubble potential is rising. You can’t just assume that you you don’t have to do anything with your dividend portfolio.
Who knows what’s going to happen, but dividend stocks in general could take a beating if the tax rate on dividends goes up in 2013. Also, when interest rates begin rising to ‘normal’ levels, all the people who’ve gotten into dividend stocks because their CDs don’t pay anything are going to go back to CDs over time, which may also clobber dividend stocks. Caution is advised, as always!
I would agree. I think once interest rates go up people will revert back to their old ways of investing. I know we will change our strategy.
This is certainly good advice but I would check the dividend cover – the number of times the total dividend can be paid from the published profits.
This should be a healthy number greater than 1.5 (arguably lower for utilities that have guaranteed income and no investment plans).
Consider also preference shares in an iffy market. The preference payout may be a little lower than for ordinary shares but you stand in front of the line if the business goes belly up.
Well said John. Those are definitely good things to consider in this situation.
I recently invested in my first dividend stocks. I chose five from the Dividend Aristocrats list. I love the idea of dividend stocks, but I have a lot more to learn about it. I’m also keeping my eye on what the tax treatment of dividends will be in the future, as Kurt pointed out.
Taxes may change this strategy for a lot of investors. I know rates are different in different countries but they should still be considered. We have a few dividend stocks but we don’t base our entire portfolio on them.