How To Start Investing in Dividends Stocks

How to start dividend investing? Investors looking for steady income or a lower risk strategy may employ a dividend investing strategy. Investing In the right dividend stocks can reward investors with predictable income. In addition, dividend companies may be reward investors with capital appreciation if they chose their companies carefully. However, like all investments, there are pros and cons as well as some risks.

To become a successful dividend investor, you need to know when to reinvest, sell, or enjoy the extra income. Furthermore, you’ll avoid the typical mistakes that some investors make with the right due diligence.

This post aims to help you discover how to start dividend investing.

How Do Dividend Stocks Work?

To help you start dividend investing, You’ll need an example to understand how dividend stocks work. Let’s say you purchase 100 shares of a firm whose share price is €10. Each share pays an annual dividend of €0.30. Your total investment would be €1,000, and you’ll get dividend payments worth €30 over a year. The dividend stock has a 3% yield.

Once you get the dividend payments, you may do various things with your earnings. For example, you can buy dividend stocks in another organization, reinvest the proceeds to get more shares of the same company, save the cash, or spend the money.

You get the dividend payments provided the company disburses them, regardless of whether their stock price goes down or up. Dividends are also predictable for most financial periods. However, some economic conditions may mean some companies can’t pay dividends. Diversifying your portfolio ensures you can receive a steady income in any economic climate.

Besides the dividend payments, if you chose your companies carefully, you’ll also benefit from capital appreciation as the companies whose stock you bought grow in value.

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Key Terms of Dividend Stock Investing

Here are some key terms you should know. They’ll help you evaluate dividend stocks, understand the dividends to expect, identify red flags, and discover the dividend stock’s reliability.

Dividend yield: This term refers to the annualized dividend shown as a percentage of the firm’s stock price. Use this metric to evaluate dividend stocks and identify red flags. You may choose a company with a high dividend yield, but you should also consider other factors, such as the firm’s ability to maintain the dividend payout.

Payout ratio: This term refers to the dividend as a percentage of the firm’s earnings. A dividend stock is often sustainable if its payout ratio is low.

Cash dividend payout ratio: This term refers to the dividend as a percentage of the firm’s operating cash flows without capital expenditures. Investors use this metric to understand the company’s dividend sustainability.

Total return: This term refers to the capital gains (increase in the stock price) plus dividends paid.

Earnings per share (EPS): This metric shows a firm’s income to the per-share value. Invest in an organization that has grown its EPS regularly over time, as they may pay higher dividends and have durable competitive advantages.

P/E ratio: One calculates this ratio by dividing the firm’s share price by its EPS. You may use this metric with the dividend yield to know if people fairly value a dividend stock.

Why You May Invest in Dividend Stocks

It may be appropriate to invest in dividend stocks because focusing on growth may be challenging. You may not predict companies that will keep growing correctly. Growth stocks may also be expensive, and you’ll lose substantial resources if the company doesn’t fulfill its promises. The everyday struggle to check and decide whether to sell growth stocks may also be too much for some people.

Investing in dividend stocks may be a better option. You may do it for various reasons, including:

1. Less volatility: Solid dividend stocks’ prices don’t fluctuate as much as those for growth stocks.

2. Predictable income: You may enjoy a relatively stable income source from dividend stocks.

3. Long-term investing: You may put your money in dividend stocks for the long term. You won’t often worry about the stocks’ performances if you choose stable companies.

How To Start Dividend Investing

Once you decide to invest in dividend stocks, the options and information can overwhelm you. You don’t have to worry. These steps will help you discover how to start dividend investing with no challenges. Get a brokerage account to begin the process.

1. Begin With Dividend Aristocrats

The Dividend Aristocrats comprise stocks from the S&P 500 index whose dividend payouts have increased for at least 25 consecutive years. These companies value their dividend investors and have little or no dividend cuts. Many investors have opted for these options, as these companies have outperformed others in the S&P 500 index.

Regulators update the Dividend Aristocrats list every year. They remove companies that cut dividends and add those that have raised their dividends for 25 consecutive years. Considering the updated list may be the best investment plan as you master the dividend stock market. You may venture into the high-risk sectors once you know enough about the market.

2. PE Ratio Is Below 20

Stock is more highly valued if its PE ratio is high. For example, Facebook has a PE ratio of 60. While this PE ratio may be helpful to investors of growth stocks, dividend stocks’ investors need the PE ratio closer to the firm’s historical average as they only grow by a small margin every year.

You can get PE ratios from financial sites, such as Yahoo Finance, Morningstar, etc. Invest when the market undervalues a firm’s stock to enjoy greater returns if it bounces back. For example, you may invest in companies struggling because of the pandemic and expect them to bounce back as normalcy returns. However, be cautious to avoid putting your money in a company that won’t bounce back.

3. Dividend Yield Is Over 2.5%

The dividend yield can be too low if the firm hasn’t raised its dividend recently or the stock price is too high. It may be best to choose stocks whose dividend yield is at least 2.5%. You may enjoy the returns you want with these options.

However, a high dividend yield isn’t everything. The sizeable earnings may be due to the stock’s price decreasing because the company might cut its dividends.

You may take various steps to avoid the dividend yield trap.

Look at other metrics beyond the dividend yield as you buy dividend stocks. For example, you can compare the firm’s yield with those of competitors. It may be a sign of trouble if the business has a significantly higher dividend yield than its peers in the market.
Check the company’s yield and payout growth history before choosing its dividend stock.
Use the firm’s payout ratio to determine its dividend’s sustainability.
Study the firm’s balance sheet, paying attention to its assets, capital, and liabilities.
Check the company’s industry, practices, and competition to determine whether it will enjoy growth and sustainable performance levels.

4. Payout Ratio Is Below 70%

It may be best to avoid companies that pay out a lot of dividends. These companies may not have adequate resources to reinvest and grow. They may also struggle to withstand tough times if they have little or no funds to ride out these periods.

You may not enjoy growing dividends with these companies, as they are already remitting an enormous percentage to investors. Instead, target a firm that pays less than 70% of its earnings as dividends to enjoy some growth and consistency.

5. Positive EPS Returns and Outlook

The firm’s earnings per share (EPS) should be positive for the next and past five years. The company is still growing if this case applies to them. A negative number shows the company isn’t growing.

Other Essential Information

You may also check the firm’s sales growth, management team, and stability before you purchase their shares. For example, a Beta of 1 or less shows the organization’s stock is stable. These signals can show you whether buying the company’s stock is an excellent investment.

Recommendations

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If you would like a copy of the template I use to to perform stock analysis than feel free to grab your copy below.

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