One of the more famous ways to build wealth is through dividend investing. Someone who participates in dividend investing picks certain stocks because of the dividend they give. A dividend is when a company provides shareholders with a small amount of cash per share periodically as a reward for just owning the shares. Companies will do this to keep their loyal shareholders happy as the company matures, and to keep new investors intrigued by the guaranteed cash.
Why Are Dividends Incredible?
Owning 1 share of Apple ($AAPL) this year will earn you about an $0.82 dividend. Split up into four, this will leave you with about $0.20 in additional cash every quarter. 20 cents may not seem like much, but if you are lucky enough to have perhaps 100 shares of Apple, you are now receiving $20 every quarter. Apple is currently at $122, let’s say it gets to $140 over the next 7 quarters. Someone who has 100 shares of Apple now has 101 shares if they choose to simply reinvest their dividend back into Apple, because 7 x $20 = $140. Another share without putting forth additional capital? I’m not sure it could get better than that.
We can even take this to the next step. If you factor in the fact that if a company’s stock price rises substantially, they are very likely to increase the dividend as well, then you are now collecting gains in both ways. These stocks are what we like to call dividend growth stocks, they pay a solid dividend and the company’s share price is in a better position to grow. These companies often have a smaller dividend yield, which is the annual dividend divided by the share price. The yield is smaller because these companies are usually much more innovative, and with innovation comes risk. Keeping the dividend the same for 30 straight quarters is much better than decreasing it for 1 quarter in Wall Street’s eyes. Therefore, companies only increase their dividend when they are overly confident they can keep providing the dividend at this level.
What Is a Dividend Yield?
Proper dividend investing means understanding the yield, and also understands the innovation plans for the stock, as well as the industry they participate in. For instance, telecommunication service companies such as Verizon ($VZ) have a higher yield because the capabilities of their company are fairly straightforward; to provide cell and internet service around the nation. You are not going to see much innovation coming out of Verizon, enough to drastically change the stock (or maybe you will? Keep reading!).
What if 100 Shares Is Too Much?
Grabbing 100 shares of a sound dividend stock is not easy at all, but it is easy to invest early and let the dividends create shares for you, as shown in the example. Even if you can only get 1 share, most brokerages now allow fractional shares, meaning your couple cents a quarter can really add up. Even if a quarter is too long for you to wait, there are plenty of stocks that provide a monthly dividend, such as Main Street Capital ($MAIN). To know when a stock pays its dividend, look at its Dividend Date, and make sure you hold the stock before its Ex-Dividend Date, to ensure you receive the next dividend.
At this point, your dividends will start to look like a monthly paycheck. In a long term mindset, this is actually the goal of most who are dividend investing, to build a strong enough portfolio so they can live off their dividends during retirement.
What Are the Best Dividend Stocks?
The answer is it depends on your current investing position, and what you expect from your dividends. Are you looking to obtain more shares? Or do you just want a hefty monthly check? Do you have $250,000 to put into your dividend portfolio? Or do you only have $250 to put in? Everyone is different, and in an upcoming post, we will outline all of the best dividend stocks no matter what your end goal. This will be a stock analysis of 25+ well regarded dividend stocks, showing you comparative analysis of each stock against the other. A proper breakdown like this is not something you can find just anywhere, so make sure you are subscribed so you do not miss out on finding out the best dividend stocks!