Why You Should Start Investing in Dividend Stocks

Why should you start investing? Are you tired of only having one stream of income? Are you tired of being unsure about how much money you will have in your retirement? If you answered yes to these questions, you've come to the right place. When you invest, you make your money work for you. All successful people became successful by investing in something whether it was stocks, real estate, businesses, something else, or a combination of a few things. When you leave money in your checking or savings accounts, you are putting yourself at a huge disadvantage because it does not grow and it loses purchasing power over time due to inflation.

What is investing?

Investing is the act of collecting money and buying a potential asset with the hopes of receiving an income or profit. When you invest, you put your money to work. This is true whether you are investing in a business, rental property, the stock market, or other assets in hopes of selling them at a higher price in the future. That is the whole purpose of investing, to generate a profit or income. There are many ways to invest and different forms of profits. While investing can have great benefits, it can also be risky, and your investments can lose value as the prices of securities such as stocks and bonds fluctuate with market conditions. In the stock market, taking on low risk usually means low returns and higher risk usually means higher returns. With that being said, there are also safe ways to generate high returns.

What are Dividends?

My favorite investments are the ones that provide a steady income through the distribution of dividends. One way to generate passive income is to hold investments that pay dividends. What are dividends? A dividend is a percentage of a company’s profits that is paid out to shareholders on a quarterly or monthly basis. A dividend is like a reward that the company gives the investor for investing in the company. To receive the dividend you must buy the stock before the ex-dividend date. This is the date on which the company needs to have a record of you being a shareholder to receive the dividend. If you buy it on this date you will not receive the dividend until the next payment date. Over time, investing in dividends can provide a great supplemental income and eventually a full-time income. In the beginning, you will not be making a lot of money with dividends. It takes time to build a good steady income due to compound interest. At first, you may be able to use dividends to pay for your daily coffee, and eventually, you will be able to replace your income from your job.

Choosing Investments

Dividend investing requires almost no work and is easy to start. Dividends can be great but when choosing a dividend stock, you have to consider the overall financial situation of a company. This part requires a little bit of research as well as quarterly checkups. You want to make sure that the company you are investing in will continue paying the dividend and even increase it every year. A high dividend could mean that the company is doing well and is generating great profits. But it could also mean that the company is not generating great profits and has no set plans to generate profits in the future. A company in this position is using its cash to pay shareholders instead of investing it back into the growth of the company. You, as the investor, should consider if a company has a long history of dividend payments and annual dividend increases as this is a good sign. If a company has recently cut or eliminated its dividend, this could mean the company is in trouble. I like to analyze stocks quickly by looking at the chart and clicking on the various timeframes of the past one year, five years, and 10 years. The chart reflects all the important information about the financial stability of the company. I look for a positive trend in growth year after year before I consider investing.

Dividend Stock Example

One example of a good dividend stock is Abbvie with the symbol ABBV. This stock pays a dividend yield of 4.79% which is $5.20 per share per year. The stock pays quarterly and there are 4 quarters in a year, so this would pay $1.30 per share per quarter. This stock also has 8 years of dividend growth. You can see all this information about any stock for free at seekingalpha.com and you can also google the company’s name followed by investor relations. For example, Abbvie investor relations. There you will be able to see the financial statements of the company as well as other information. When searching for a company you also want one that has good performance in the growth of the share price. You can see this by looking at the chart and clicking on the time frames for the past month, past 6 months, past year, past 5 years, and past 10 years. This should show positive and increasing performance. To start investing, you will need to open a brokerage account. I have experimented with many investing platforms and my favorite have been M1 Finance, Etrade, and Fidelity. Any of these will meet your needs.

Closing Thoughts

If you learned something from this letter, make sure to share it with friends and family. Investing is something that can set you up for success over many years of consistency. "If you don't find a way to make money while you sleep, you will work until you die."- Warren Buffet.

Enjoy your day and happy investing!

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