Updated 3/2/2022.
Are you looking to get into the investing game? Maybe, you should start by purchasing dividend stocks to start your portfolio. Your portfolio will contain your stocks and any other future investments.
They’re essential to a well-rounded investment portfolio.
What Are Dividend Stocks?
Before getting into what they are, you may wonder what a dividend is.
A company pays dividends to the owners of its stock. Stock represents pieces of a company and each piece is a share of the company. Therefore, a dividend is paid often quarterly to the owners as a return on their investment.
Thus, dividend stocks are stocks that pay dividends to the owners of the company because not all stocks pay dividends.
How Do You Find Them?
When a company desires to fund its growth and increase its working capital, it often “goes public” to achieve its goal when other sources of funding aren’t available. An initial public offering or an IPO is the first time a company goes public.
As a public company, they sell their stock through a stock market exchange. A stock market exchange is where buyers and sellers conduct their transactions under regulated conditions. It’s a necessary part of a free-market economy.
The leading American stock exchanges include the New York Stock Exchange (NYSE) and NASDAQ. They handle the stock transactions and maintain any company news and financial reporting.
The SEC or the Securities and Exchange Commission is an independent federal agency that makes sure that the U.S. stock exchanges are following regulations.
You can find stocks to buy by going directly to the company, electronically via discount brokerage firms, or by going through a stockbroker. The stockbroker acts as a middleman to facilitate the stock transaction and works at a brokerage firm.
Do Your Homework
You’ll need to open a brokerage account to purchase stocks through a brokerage firm. They range from online discount brokers to pricier full-service stockbrokers.
An online brokerage account allows you to purchase and manage your own stocks as well as other investments such as mutual funds and bonds.
Some online brokers include Merrill, Ameritrade, and E*TRADE.
Whereas a managed brokerage account provides you with either management from a human advisor or a Robo-advisor.
A Robo-advisor relies on computer algorithms to handle your investments. Wealthfront, Betterment, and Ally Invest comprise a list of the best Robo-advisors.
Investing in Dividend Stocks
You can buy them through exchange-traded funds (ETFs) or by individually purchasing them.
Dividend ETFs
- Most of these funds include several dividend stocks that provide you diversification and balance out your payout.
- Choosing a low-cost fund that picks stocks from the S&P 500 stock index with commission-free options minimizes the money spent while providing you with a safe investment strategy.
- When considering the fund, look at the dividend yield. This is how much you can expect to receive and is usually shown as a percentage. Of course, the higher the yield, the better the investment. However, proceed with caution on anything over 3.5%
- Other factors to consider include 5-year returns, the expense ratio, and stock size.
- You can buy one ETF and not have to worry about tracking several companies as you would have to if you bought the stock individually.
Individually Bought Dividend Stocks
- It requires time to build a portfolio but provides more control of what stocks you want to be included.
- You’ll research the company to assess its ability to pay out dividends in the future.
- Look at their payout ratio. How much do they pay out in dividends? If it’s over 80%, beware. It depends on the industry.
- Diversification is key to minimizing losses.
Whether you buy dividend stocks through an ETF or purchase them individually, owning them is a great way to build wealth. Check out the best investments in 2022.
