Dividend investing: how to start the easy way
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A few weeks ago, I got a call from a friend of mine. She was advised by someone at her company to start dividend investing. She wasn’t really sure why she’d want to do that. So, she gave me a call.
We chatted for over an hour on Teams. It was great to catch up, but I also had the chance to explain to her what dividend investing is all about and why it could be a good fit for her.
She suggested I turn it into an article. So I did, and I started the article with the same question I asked her. If you have any questions, just let me know. Enjoy!
Grow your own money tree to reach financial freedom
Have you ever dreamed of financial freedom? Would you love to get a regular paycheck without having to work for it at all?
If so, dividend investing might be a great way for you to achieve that goal. It allows you to build a nice, steady stream of money over time. And before you know it, you’ll be less dependent on work and still have income.
Just like a regular tree grows leaves every year, your money tree can generate a nice, steady stream of cash flows. That makes dividend investing a powerful strategy for those who want to become financially free!
What is dividend investing
Dividend investing is a way to make your money work for you. It simply means buying stocks in companies that pay nice dividends. Ideally, you’ll want to look for companies with a track record of stable and growing dividends. It’s one of the best ways to invest, hands down! You’re investing for those sweet, slow and steady payments in mature companies.
Dividend stocks are great for providing a steady stream of money, but stock prices can go up and down (and will), in the short term. When it comes to investing in dividend stocks, it’s really important to try not to let short-term market movements influence your decisions.
If you hold the dividend stocks for years and keep reinvesting, you’ll be happy to know that eventually this could generate enough passive income to cover your expenses. This provides you with options. You get to choose if and when you work. Sounds like financial freedom, right?
How to start dividend investing in five+ steps
Starting is easy! Just buy dividend stocks! 😀
When you’re ready to buy, you already took the first, and most important, step: deciding that you are going to invest in so-called dividend stocks. Congratulations, you took the first step on your way to financial freedom.
1
Adopting the dividend investing mindset
But, hold on, how do you know what stocks to buy? What stocks are indeed dividend stocks? Great questions. We need to answer them before you start buying. So, let’s go to step two.
2
Knowing how to spot a dividend stock
A typical dividend stock is a stock of a company with a track record of stable and growing dividends. Look for a history of dependable dividend payments, and find out if these payments have steadily increased. Reliable hikes to dividend payments indicates a company’s commitment to returning profits to shareholders.
Some companies have lower dividends at the moment, but they’re increasing every year. For instance, Apple and Nike. Other companies consistently pay high dividends, like Coca-Cola.
3
Pick stable dividend paying stocks
Now you know how to spot a dividend stock. Next step is to pick and buy some dividend stocks.
At the outset, it’s important to do thorough research. It’s important to understand what the company is offering in terms of product or service. Will people still be using this product in 20 years? Is the company in a good position to stay ahead of the competition? How recession-proof is that company? Is the market cap at least 10 billion? And is the dividend sustainable?
It’s also a good idea to check out sectors that pay high dividends, like oil, telecoms, utilities, or food. Finally, take a look at the dividend yield. Ideally, that should be somewhere between 2% and 6%.
When someone says a stock has a “high yield,” that usually means the dividends are high compared to the stock price. It might not be a good thing, though. It might not be sustainable in the long run.
Great examples of dividend stocks are the Dividend Aristocrats and Dividend Kings.
Dividend Aristocrats are U.S. stocks that have paid their dividends every year for at least 25 years. Plus, they increase their payout every year.
Dividend Kings take it to the next level. These are U.S. stocks that have paid their dividends annually for at least 50 years and have also increased their payouts annually.
You could also just buy an ETF that focuses on dividend stocks. That’s a decent option if you just want to buy and forget. Which brings us to step four.
4
Buy and hold
So you have selected the stocks you want to buy. Great. Go and buy them. And when they are in your portfolio, don’t sell them.
The strategy you want to follow is buy and hold. Remember, you do not want to let short-term market movements influence your decisions.
5
Keep buying (reinvest the dividends)
If you’re building your portfolio, keep buying those dividend stocks! That way, over time, your portfolio will grow.
Also, don’t forget to reinvest your dividends. Use the dividends you receive to buy more shares. This is a great way to grow your portfolio and make use of that nice compounding effect!
6
Final step: Revisit the dividend investing mindset
I know it can be tough, but try to think long term. Dividend investing is a strategy that you can stick with for the long haul.
It’s okay to take your time and not get too caught up in short-term market movements. Remember to focus on the growth of your income stream, not the daily value of your portfolio.
What I like about dividend investing
Dividend investing is a great strategy to consider. More money, less stress. These are some of the most important reasons I like this strategy.
1
Provides free cash
Dividend investing offers free cash you don’t have to work for. You can spend this money right away or invest it for more free cash.
By reinvesting the free cash, the dividends, you create a so-called snowball effect. You get dividends on more and more shares, which means your free cash can grow a lot over time.
When you no longer want to reinvest, you can use the free cash to spend as you please. This could be your paycheck without having to work for it.
2
It’s easy to do
Dividend investing is easy, because the main thing to do is buy and hold. Find the right stocks, keep them in your portfolio, and receive dividends. That’s it.
You don’t have to worry about picking the winner. As long as you invest in companies that are stable and continue to pay dividends, you’ve got a solid strategy.
3
Steady portfolio growth
Dividend investing takes time, but by reinvesting, you gradually build up your wealth. This helps your portfolio grow in a way that’s independent of market changes.
If you keep your money in those dividend-paying companies, you don’t have to keep a sharp eye on the market all the time.
4
Invest in stable stocks
You’ll have less stress during market downturns. When the market’s down, you still get dividends.
With lower stock prices, you can buy more shares for the same amount of money. This means you’ll get a bigger income stream in the future. Dividend investing really shines in a bear market.
What I hate about dividend investing
I just explained why dividend investing is such a great strategy. What’s not to like? Well, there are some potential problems as well. Let me explain what I don’t like. These may not be an issue for you, but it’s always good to keep them in the back of your mind.
1
The stocks are not growth stocks
When it comes to dividend-paying stocks, it’s all about finding ones that consistently pay out a stable annual dividend. These companies are often priced at a premium. And there isn’t usually much room for growth and a price increase on the stock itself.
2
The dividend can be too good (to be true)
Sometimes a high dividend seems too good to be true. A 10% dividend seems pretty attractive, but it can also be a warning sign. In a recession, there’s no guarantee the company will be able to pay the expected dividend.
Unfortunately, in the past some companies have offered a high dividend yield but then said they were going to reduce or even cut the dividend, for a while or even permanently.
3
It takes time (and patience)
Dividend investing is all about playing the long game. You probably won’t see big profits in the short run. It takes time for your portfolio to grow.
To make this work, you need to be patient. That can be an issue if you’re looking to see some results sooner rather than later. You really need time in the market.
4
Dividend stocks can be pretty pricey
True. The price of a share in a great company can be pretty high. That could be a deal-breaker for you when it comes to investing in that company.
Don’t let that put you off. Ultimately, the share price is irrelevant. You want to find a stock that’s growing steadily and paying out a growing dividend. It’s also worth looking at how consistent they are, how much cash they have on hand, and what their debt is.
Wondering if dividend investing might be a good fit for you
You know what I love and hate about it. Now I’d love to know if you think dividend investing is a good fit for you.
You know your own stock market identity best. A stock that’s a little boring, with a price that doesn’t move much and that pays out a dividend every quarter or year, has a different vibe than a cool tech stock (like Nvidia) that’s all over the news, going up and down a lot.
It’s only natural to have different feelings about different types of stocks. After all, they respond differently to market conditions, just like you do. If you’re not bothered by boring stocks, then go for it. Make dividend investing a part of your stock market identity.
Is dividend investing something that could work for you? It really depends on your goal and timeline. In short, on your investment plan.
Dividend investing could be a good fit if, for example, you’re plan is to retire early and live off the income from your investments. You’ve already set your goal (letting your money provide your income) and the time frame (the long term).
The main reason to choose dividend investing is the steady income it provides. It’s kind of like renting out real estate. That also means you get a regular income every month.
When your money tree is big enough
A big tree is a strong, deeply rooted symbol of resilience. Surviving the effects of storms and natural disasters. It takes a lot of strength to uproot a tree. It’s a perfect symbol to represent your dividend investment portfolio.
Your money tree is big enough when you reach your goal.
That’s the simplest answer I can give you. Related to the example mentioned above, you’ve reached your goal when your portfolio can provide your income.
When the income from your investments is enough to cover all your expenses in retirement.
That’s when you’ve reached financial freedom!
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