Overview
This article is the second part of the All You Need Is a Simple, Well-Diversified Portfolio series. The post continues to look at what makes a good investment plan.
Avoiding Attempts to Predict Market Movement
Investing in stocks is a good option for beginners because it’s easy to get started. Increase your stock portfolio by setting aside a regular monthly investment. Moreover, you can supplement your income with dividends by selecting dividend-paying stocks in your portfolio. Your ability to stick to your investment strategy is crucial to the success of this method. Dollar cost averaging is a great investment strategy that involves making little, consistent stock purchases over time. As time goes on, it helps savers accumulate the greatest possible wealth.
Exactly What Does It Mean to “Dollar-Cost-Average” Something?
Dollar cost averaging is the process of investing a set amount of money every month, no matter how much the price of a share goes up or down. Because investing a large chunk of money at the peak could be disturbing if prices decline, dollar-cost averaging is a great strategy for those with a lower tolerance for risk. Also, many of us don’t have a lot of money to invest. Paychecks are the lifeblood of our financial existence. That being the case, dollar-cost averaging makes the most sense for us.
Investing with dollar-cost averaging has incredible potential. The most important thing is to maintain a consistent investment schedule. So, never again will you have to worry about buy-low or sell-high strategies, hedging, or other similar methods of investing for the short term. Dollar cost averaging can help reduce long-term risk.
And Exactly What Do Stocks That Pay Dividends Mean?
Dividend stocks are those that pay investors dividends on a regular basis. These companies often have stable profits and a long-term commitment to dividend payments. For example, stockholders of Apple (AAPL) presently get a quarterly dividend payment of $0.23 per share. That works out to $23 for every 100 shares of Apple stock owned each quarter.
So, Apple is a dividend stock, albeit not a high-yield dividend stock. With a dividend payout of $0.23 per share per quarter, the dividend yield is a meager 0.61% per annum. Therefore, long-term capital gains are the primary focus for Apple stockholders.
What Stock Pays the Highest Dividend?
Some of the most popular high-yield dividend stocks right now include Altria Group (MO), Verizon Communications Inc. (VZ), and Ares Capital Corporation (ARCC). See how their dividend yields compare to one another so that you can make an informed decision.
| Stock Symbol | Name | Price | Dividend | Dividend Yield |
|---|---|---|---|---|
| MO | Altria Group Inc | 46.53 | 3.76 | 8.15% |
| ET | Energy Transfer LP Unit | 13.05 | 1.22 | 9.54% |
| ARCC | Ares Capital Corporation | 19.45 | 1.92 | 9.92% |
| ABR | Arbor Realty Trust Inc | 15.07 | 1.6 | 10.67% |
| SU | Suncor Energy Inc. | 35.3 | 1.56 | 4.54% |
| TD | Toronto-Dominion Bank | 65.49 | 2.87 | 4.31% |
| JNJ | Johnson & Johnson | 154.02 | 4.52 | 2.96% |
| VZ | Verizon Communications Inc. | 38.26 | 2.61 | 6.81% |
Exactly How Do Stocks That Pay Dividends Work?
To get dividends, you need to be the owner of shares in the company through a brokerage account or retirement plan like an IRA or 401(K). Dividends are payments made to stockholders by a firm out of a percentage of its profits. Dividends are an established and recurring income stream for company stockholders. You won’t have to do anything to get your dividends deposited into your account when they’re paid.
For instance, I have 1,000 shares of Suncor Energy Inc. (SU) stock in my portfolio. The dividend per share is $0.38 per quarter. On the dividend payment day, my brokerage account will be automatically credited with $380. As I received dividends, I put the money toward purchasing more shares of Suncor Energy Inc. (SU). Let’s keep this simple and say that $38 is the current price of SU stock per share. That’s an additional 10 shares. ($380 ÷ $38 = 10). Now I have 1,010 shares. In the next quarter, I will receive a dividend payment of $383.80. (1010 x $0.38 = $383.80).
Tips for Buying Dividend Stocks
Dividend Growth
Investing in stocks that pay dividends requires little effort. But you should take your time and do your homework. There are a few things to remember. Prior to anything else, you should check for a track record of dividend increases. Constant dividend growth is a leading economic indicator of a financially sound company.
Dividend Payout Ratio
Second, try to choose companies that have a payout ratio that is not too high. A lower dividend payout percentage indicates that the company is keeping some of its profits for growth and is therefore less likely to cut dividends in the future. On the other hand, too high a payout ratio might be detrimental to a company’s long-term sustainability.
Yield on Dividends
Finally, check the dividend yield to see if it is currently acceptable. A decent rule of thumb is to look for dividends yielding at least as much as the current 10-year Treasury. Twice that much may be a warning sign. An abnormally high dividend can have a significant impact on a business’s bottom line.
Increasing Wealth via Investing and Compounding Dividends
Dividends compound if you reinvest them in the company by purchasing additional shares and then reinvesting the dividends from those shares. As a result, an investor’s wealth grows exponentially over time if the dividends they receive are reinvested in the market to buy more shares. When compared to taking the dividend income and putting it in your pocket, this strategy will yield greater returns over time.
See the working example below. By now, you would have over $129,000 if you had invested $10,000 in T. Rowe Price (TROW) in 2003 and kept reinvesting your dividends. In contrast, if you did not reinvest the dividends, your total would be $22,000 lower.
Conclusion
Get a head start and put away as much money as you can. Saving at least 20% of your income is highly recommended. Put your money to work for you by purchasing stocks. Invest in both growth and dividend-paying stocks to diversify your portfolio. Your wealth will increase rapidly as a result of compound interest and dividends that you reinvest in the stock market. Hence, retiring early will become a practical possibility.