If you’ve been reading up on dividend investing or dividend reinvesting plans (DRIPs), you’re probably eager to get started. Good! The sooner you begin your journey of dividend investing, the longer your time horizon for returns. Now you just need to figure out how to start buying dividend stocks.
As investing strategies go, investing in dividend stocks is a simple one to get into. It takes a little investigative work upfront, but once you’ve picked your stocks and set up your investing schedule, the companies you choose will do the rest of the work for you.
Do Your Research
Before you buy any dividend stocks, check out a few potential companies that interest you first. Getting to know a few companies is a great way to understand how dividends work and what you can expect from them.
For example, first see if the company you’re interested in even offers a dividend. If they do, what’s the yield and how often does it pay out? Then look at their dividend payment history to see how long they’ve been paying it (Dividend Aristocrats) or if they’ve ever had to cut it. This insight will tell you a lot, without having to get into the company’s current balance sheet.
If you really want a good picture of what a certain company’s dividends look like, plug their information into a dividend investing calculator.
Diversify Your Prospects
Once you’ve read up on a few companies and understand their dividend structure, it’s time to start forming your dividend investing strategy. And, like any investment strategy, this one starts with diversification.
There are 11 different sectors in the stock market, spanning from tech, to industrials, to consumer goods and beyond. And while dividend investing is one of the safer investment strategies, it’s always a good idea to hedge. Plan on spreading your investments out across these 11 sectors, investing in 3-4 of them at a minimum. This way, if economic downturn hits one market, your portfolio will be spread out enough to mitigate any effects.
Diversification depends on how many individual stocks you’re planning to invest in. Here are a few scenarios to consider:
- If you’re going to invest in 3-5 dividend paying stocks, try to find companies in different markets. For example, invest in transportation, consumer goods, industrials and finance stocks.
- If you’re going to invest in 15-20 individual dividend stocks, try to spread out your investments with some evenness. You don’t need a stock in every sector, but having no more than 3-4 in a given sector is smart for diversification.
- If you have no strong preference to any sector or don’t feel comfortable evaluating companies in a specific sector, consider dividend-paying ETFs for a basket diversification approach. An example would be the iShares Core High Dividend ETF (NYSEARCA: HDV)
Pick stocks you’re comfortable owning for the long-term and always be aware of your weight in different sectors of the market. Balance is the key.
When you’ve chosen the securities you want to invest in, don’t forget to select “reinvest dividends!” This is the cornerstone of a dividend investing strategy. Having those dividends go right back into share purchases means compounding your position every time a dividend is paid. And, the more shares you have, the more dividends you’re owed, and the more purchases you can make.
The key to any good dividend growth investing strategy is investing regularly over the long-term. Look at your monthly income and budget to determine how much you can set aside to invest. Then, figure out when you’re going to invest and in what intervals.
You might have the ability to buy shares of every company in your portfolio every month. Or, you might choose to rotate purchases each quarter, slowly building up different sectors of your portfolio. Or, you might be the type of investor to fund one stock every pay period.
Whatever your approach to dividend investing, it should be consistent. If you get caught up in timing the market or building one position heavily, you’ll risk unbalancing your portfolio and neglecting dividend-payers that might otherwise be earning you money.
Pay Attention to Your Holdings… but Not Too Close!
Dividend investing takes a long time to pay off. But rest assured, it does pay off. Someday when you turn off the reinvestment and begin collecting dividend payments, you’ll enjoy passive income that growth investors or non-investors simply don’t have access to. The key is not getting wrapped up in the everyday fluctuations of the market.
Take a look at your portfolio every quarter to gauge its health. Avoid the temptation of chasing stock trends or cashing in on high performing stocks. One of the only times you should sell is to offset capital gains losses, or if you think your money could work for you better in a different dividend-paying stock. Otherwise, stick to the long-term mentality.