As an investor, you may be well aware of the concept of making your money work for you. Also, you may be attempting to position your portfolio to support a very early retirement. There are multiple types of investments that you can choose to add to your portfolio to maximize growth while decreasing risk. One option that has helped many young investors retire early is dividend stocks. A closer look may reveal that this is the investment option that you want to add to your portfolio.
What Are Dividend Stocks?
Dividend stocks can increase or decrease in value. So can non-dividend stocks. Therefore, there is some risk associated with investing in them. However, they also produce a regular dividend for you. This is a payout on the stock. The company makes it to its investors. It most commonly is paid out on a quarterly or monthly basis.
Your annual dividend return can vary from less than one percent to six percent or more. This is out of the stock’s price. You can enjoy using this dividend payout as a source of income in your retired years. Before you reach retirement, you can reinvest dividends. In this way, you can purchase additional stock. Some people have such significant dividend income that they have retired solely on this income. Others include it as part of their diversified stream of income. Examples include real estate rental income or other income sources.
Why Should You Invest in Dividend Stocks?
If your goal is to make your money start working for you, you may be most interested in creating a residual income stream from dividends. You can rely on it in your retired years. Through dividend income, you can enjoy this regular stream of income that you are looking for. In fact, if you start investing early enough, you may even be able to generate enough income to live entirely off of dividends by the time you are 37 years old.
Just like stock prices go up and down, dividend yield can also increase or decrease. However, you can easily mitigate this risk. Choose to invest in reliable companies that have a solid track record of never or rarely decreasing their dividend. This information is freely available online through your research efforts.
When you invest in dividend stocks, you can benefit in these key ways:
- You can enjoy regular income from the dividends through periodic payments.
- Your lump sum investment in the stocks can also continue to increase over time. Stock prices are known for being relatively volatile.However, in the long term, you can generally expect stock prices in solid companies to increase. This means that you are enjoying taking income from your investments without negatively impacting the overall value of your portfolio or impeding its growth.
- You can diversify your portfolio to mitigate risk, increasing the likelihood of a relatively stable stream of income and portfolio growth.
How to Start Investing in Dividend Stocks
If you are ready to start investing in dividend stocks, you may be wondering what steps you need to follow. Investing in dividend stocks may be easier to do than you might think. You can get the ball rolling by following these steps:
- Open a brokerage account. You generally cannot invest in dividend-producing stocks until you open a brokerage account. There is a wide range of brokers to choose from. Some offer share builder accounts. They allow you to continue to purchase shares in stocks in small and regular increments through automated purchase orders.
Other brokers are designed for larger investors who want to make significant investments. In addition to these variations, there are also variations in the fees charged per transaction. Also, in the type of content available on the website for you to use as research and analysis. Finding a broker who perfectly fits your needs can take time. However, this effort will be well rewarded once you start investing in stocks.
- Determine how much money you want to invest. This decision should be based on careful analysis of your current portfolio and your investment objectives. If you want to retire when you are 37, you may be heavily invested in income-producing assets. Also, you may want to position your portfolio accordingly. However, you also need to consider risk. It can be risky to place all of your assets in a single investment type. If you choose to invest heavily in this type of asset, ensure that you invest in stocks from different sectors to mitigate risk.
- Fund your account. Transferring funds must end before you can make your stock purchases. Link your brokerage account with other asset accounts you own, such as your checking account. You may need to verify your account through test deposits. As such, this process can take several days in some cases. As soon as you have linked all of your accounts successfully, you will be able to transfer funds. Then you can begin purchasing your stocks.
- Make your stock picks carefully. While you are waiting for your accounts to link to your brokerage account, begin researching stock picks. There are several strategies investors use to make their selections. For example, analyzing price per earnings ratios is a common method.
You can also research the brokerage’s own ratings and picks. Use this as further confirmation that you are on the right track. In some cases, it is important to review news stories. Consider your own personal interactions with a company through its products and services.
For example, if you know that a company has poor customer service or faulty products, you may want to steer clear of investments there. Instead, choose companies that you believe in and that have great financials to back up your selections.
- Focus on dividends. Because your goal is to retire by 37 on dividend income, you must also review the stocks with the top dividend yield. This information is easily located through stock analysis and research. A reasonable yield may be between three and four percent. Still, you can also find some stocks with a slightly higher yield that are still sound investments. Consider those with very high yields as being risky investments.
- Monitor your account periodically. If you have invested heavily in dividend stocks, your inclination may be to monitor your accounts daily. However, this can often result in emotional buying and selling. Stock prices will increase and decrease. However, your yield generally may change minimally over time if you have made solid investment decisions. With this in mind, consider reviewing your accounts every couple of weeks to monitor growth. Before you make a decision to alter your investments through buying and selling activity, carefully research any new companies that you want to invest in.
Dividends can provide you with the relatively stable stream of income that you desire in your retired years. They can even help you to reach retirement age sooner. Stock investing generally can be risky. As such, you should carefully review all aspects of stock selection as well as of dividend investing. Then you can make the decision to pursue this as an investment option.