How to Invest in Dividend Stocks Like a Financial Pro

Investing in dividend stocks can be an excellent way to build wealth – where else can you park your money and receive a portion of a company’s earnings?

A dividend may seem like a trivial amount to the untrained amateur, but true financial professionals know that they add up over time and create a compounding effect, one that Albert Einstein referred to as the “eighth wonder of the world.”

If you are interested in growing your wealth and becoming financially independent – this is one of the best ways to get started.

How to invest in dividend stocks? Keep reading this guide to learn more about dividends and how they can help you achieve your financial goals.

What Are Dividend Stocks

There is a common phrase in the world of investments that states there is no “free lunch” in the stock market – meaning there will be no handouts, and you inherit risk when entering into the financial markets.

Well, dividends are about as close as it gets to receiving free lunch on wall st. They are a share of earnings paid to the investors holding shares of the company. Dividends are typically paid each quarter of the year, but can also be paid annually.

Companies that pay higher dividends are typically viewed as safer, more reliable investments because they have established earnings and can share some of the earnings with investors.

How to Invest in Dividend Stocks

Investing in dividend stocks is just like investing in any other equity – it is a simple and straightforward process.

First, you will need a brokerage account set up to have the ability to initiate the trade. After setting up your brokerage account, you will have to deposit some money into the account to get you started investing – it might take a few days to initiate the deposits and verify the funds.

Now, it’s time to get started buying your first dividend stock, but where do you start when there are over 630,000 publicity traded companies across the globe? This is what separates the professionals from everyone else – finding the right stocks to invest in.

Due Diligence

This is the most important part of the investing process – without knowing exactly what you are investing in, how will you know if they will generate any returns?

Doing your due diligence means to research into every aspect of the company before pulling the trigger on an investment. This includes:

  • Analyzing the companies financial reports
    • Income Statement
    • Balance Sheet
    • Cash Flow
  • Checking valuation metrics
    • Price-to-Earnings (PE)
    • Earnings-Per-Share growth (EPS)
    • Price-to-Book (P/B)
  • Looking into the competition/ industry
  • Institutional investors
  • History of the stock
  • Upcoming catalysts
  • Risks

Reviewing these few items before making a buying decision can significantly improve your investing abilities. The financial reports will give you a good idea of how profitable the company is or can be in the future. The valuation metrics will show you the companies value relative to other important factors.

An effective way to review the companies industry is by completing a SWOT analysis. The analysis consists of the companies Strengths, Weaknesses, Opportunities, and Threats that can potentially affect the company.

Seeing what institutions are buying can sometimes give you a good idea of where the stock price is headed. If the institution is known for beating the market, it can be a good indicator of the stock’s quality.

The history of the stock is essential to know. What has caused the price to either increase or decrease over time, and what has changed now?

Growing Your Wealth

After initiating your stock purchase(s), you will have to set your account or tell your broker to reinvest dividends automatically. This way, each time a dividend is paid out by one of the companies you own, your brokerage will automatically reinvest that money and put it towards more stock.

This way, your money is making money. For example, say you own 100 shares of Apple stock. The end of the quarter just passed, and you received $0.77 per share in dividends, so you receive $77. With reinvested dividends, your broker puts this money towards more apple stock.

So instead of owning 100 shares of stock, you may now own around 100.75 shares. With the extra 0.75 share, you can now generate additional returns on it.

You can see how compounding your wealth through reinvesting dividends can significantly speed up the wealth growing process.

How Much Do I Need to Invest in Dividend Stocks

Something incredibly exciting happened this past year with many brokerages – giving individual investors the option to buy fractional shares. With the ability to buy a piece of a share, it opens up opportunities for more people to grow their wealth.

Many people look at the stock market as a rich man’s game, but the entry barriers have been lowered significantly. With that being said, you can invest as much or as little as you want in most dividend stocks. Check out these stocks if you are looking to purchase dividend-paying stocks with great returns.

Benefits of Investing in Dividend Stocks

Believe it or not, a significant portion of the returns you will generate over time will come in some way from dividends. In fact, according to a recent study from Hartford Funds and Morningstar — for the past 50 years, 78 percent of the total returns cumulated from the S&P 500 index can be traced to reinvested dividends.

To effectively accumulate wealth and take advantage of the “eighth wonder of the world,” you will need to buy dividend-paying stocks. One thing to understand about dividend-paying stocks is that they typically pay a dividend because they are an established company with proven earnings history.

Buying shares of these companies can be rewarding not just for the dividend, but also for owning a share of a well respected and profitable company.

For More Information on Stocks That Pay Dividends

Investing in stocks that pay a dividend can be one of the best decisions of your life. They can help you grow your wealth and claim your financial independence. They can also help you plan for retirement and give you that ability.

For more material on how to invest in dividend stocks, check out the rest of our website!