When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
Getting started with dividend investing
Dividend investing is a wealth-building strategy that all should at least consider – whether they are beginners or experienced investors.
Big ideas
- Many companies payout dividends to distribute earnings to shareholders and encourage stock ownership.
- Investors can use them for passive income and to grow wealth over the long term.
- Dividend rates are per share and the dividend yield shows how much it is as a percentage of the share price.
What is a dividend?
A dividend is cash or sometimes shares that a company will pay to shareholders on a regular basis, just for owning the shares. Dividends exist so that companies can share profits among their owners. Investors can use them as a source of income or use the payout to buy more shares and increase the size of their investment.
What is a stock dividend?
A stock dividend is what a company will payout to shareholders who own the company’s stock.
A company will declare a dividend per share, so each share you own entitles you to a payout.
What is a dividend on a stock? The size of your payout is proportional to how many shares you own.
A company will declare a dividend per share, so each share you own entitles you to a payout.
What is a dividend on a stock? The size of your payout is proportional to how many shares you own.
Example
A shareholder with 100 shares will get 100x the dividend of a shareholder with 1 share.
A dividend payment from Trading 212
Every investor wants the best app for dividend investing. You needn’t look any further than Trading 212.
The money received as a dividend is sent to your Trading 212 account without you having to do anything. You will have made money by literally doing nothing. You don’t even need to sell any of your stocks!
The money received as a dividend is sent to your Trading 212 account without you having to do anything. You will have made money by literally doing nothing. You don’t even need to sell any of your stocks!
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Goal of dividend investing
The goal when investing in dividend stocks is not to find the next rocket ship stock headed for the moon! There are two main objectives:
- Earning a passive income
- Growing your wealth for the long term
The one you’re more focused on will often depend greatly on your age. Older investors that have retired or are close to retirement can use dividends as a source of income to replace the income earned by working. Younger investors who are working and don’t rely on other sources of income can reinvest the dividends to grow their wealth before they retire.
These goals can both be achieved by investing in strong, reliable companies that raise the amount they payout to shareholders as dividends over time.
These goals can both be achieved by investing in strong, reliable companies that raise the amount they payout to shareholders as dividends over time.
Using dividends to earn income
Dividends are usually paid straight into the cash balance in your brokerage account. You can withdraw the cash as a source of income or use it to buy more shares. The strategy of using dividends as income is known as income investing. The goal is for the cash you receive to supplement and eventually replace your salary once you retire.
Building wealth with dividends
Instead of using the dividend payout as an income, you can reinvest it to buy more shares.
This creates a snowball effect - by owning more shares, you earn bigger dividends because they are paid per share, reinvesting those bigger payouts makes even bigger payouts. This process is known as compounding returns.
A comparison between the theoretical past earnings made when taking out the dividends versus reinvesting them can be seen in this chart of the S&P 500.
This creates a snowball effect - by owning more shares, you earn bigger dividends because they are paid per share, reinvesting those bigger payouts makes even bigger payouts. This process is known as compounding returns.
A comparison between the theoretical past earnings made when taking out the dividends versus reinvesting them can be seen in this chart of the S&P 500.
Source: Citygroup. Past performance doesn’t guarantee future results.What’s really noticeable is how steeper the line gets. The line shows how much more you could make in later years because the impact of compounding grows over time. Like a snowball rolling down a hill.
Pros and cons of dividend investing
A good dividend stock investing strategy has many advantages and suits many types of investors, but there are some limitations, meaning it is not for everyone.
Pros
Pros
- It is one of the simplest forms of passive income. If you compare buying a dividend stock to buying a rental property, there’s just no comparison in terms of simplicity.
- You’re investing in larger, blue-chip companies, which generally have been in business for decades, making it one of the least risky forms of investing.
- You can live off the income from your portfolio but it takes a lot of money and usually a lot of time to earn the money to do that.
- Compounding returns means investing even a small amount of money could lead to big long-term gains.
- Dividend payouts from top companies will tend to rise faster than general prices, offering you protection against inflation.
Cons
- Not many ‘home runs’. The stock price of dividend-paying companies will often remain in the same price range for years. So again, this is not the way to go if you're after a quick buck.
- If there is a downturn in the overall stock market, blue-chip stocks that pay dividends will usually go down less than the broader market, but they will most likely still go down, bringing your account balance down. Remember, any time you invest, your money is at risk.
- Dividends aren’t guaranteed to stay the same. There is no obligation for a company to keep it, and when times are tough, companies will cut the dividend to save money and, in doing so, cut your source of passive income.
In dividend investing, there is a lot less ‘speculation’ than in other investments, like investing in growth stocks or day trading.
It’s critical to realise that this style of investing is not about trying to predict which way the stock price is going to go. The intention must be to find companies that are most likely to consistently payout to shareholders.
It’s critical to realise that this style of investing is not about trying to predict which way the stock price is going to go. The intention must be to find companies that are most likely to consistently payout to shareholders.
Where can I find dividend stocks?
A dividend stock is any stock you can purchase on public markets that pays out a regular dividend. There are different types, often categorised by how long the company has been paying out to shareholders. Companies that have paid out consistently for over 25 years are affectionately known as dividend aristocrats.
There’s nothing wrong with using pre-existing lists of the most popular stocks as a starting point. The best dividend investing books, such as Dividends don’t lie by Kelley Wright and Get Rich with Dividends by Marc Lichtenfeld, have many good suggestions.
On the Trading 212 app, you can find such in the Dividend category. It’s nearly all household names. And that’s the point. In all likelihood, these companies aren’t going anywhere.
There’s nothing wrong with using pre-existing lists of the most popular stocks as a starting point. The best dividend investing books, such as Dividends don’t lie by Kelley Wright and Get Rich with Dividends by Marc Lichtenfeld, have many good suggestions.
On the Trading 212 app, you can find such in the Dividend category. It’s nearly all household names. And that’s the point. In all likelihood, these companies aren’t going anywhere.
AT&T is a good example of the kind of longevity you want to see in a dividend-paying company. It was founded in 1885 by Alexander Graham Bell, the inventor of the telephone, and it is still in business today! There is always a possibility that AT&T could go out of business after 137 years in the year you decide to invest, but it’s unlikely.
When investing in a stock, it is especially important to get familiar with the company that you’re investing in. The better you know a company, the more confidence you’ll have to hold onto the stock and reap the long-term rewards as a shareholder.
When investing in a stock, it is especially important to get familiar with the company that you’re investing in. The better you know a company, the more confidence you’ll have to hold onto the stock and reap the long-term rewards as a shareholder.
What is a dividend rate?
The dividend rate is the amount of currency a company will pay you per share you own. For example, Apple’s dividend rate in 2022 was $0.23.
Example
You own 10,000 shares of Apple (AAPL) that pays out £0.23 per share per year.
10,000 x £0.23 = £2,300
10,000 x £0.23 = £2,300
What is a dividend yield?
Dividend yield is the amount you’ll get paid per year (dividend rate) as a percentage of your investment. As a dividend investor, this is probably the first statistic you will check for any new investment.
That’s why it is listed under ‘Key ratios’ on the Trading 212 app.
That’s why it is listed under ‘Key ratios’ on the Trading 212 app.
Example
Let’s say you bought $1000 of AT&T stock and the dividend yield is 8.70%, you’ll make $87.00 in dividend income for the year. If you invest $100,000 – you’ll earn $8,700 instead.
Wrap
There are two key goals behind dividend investing: building wealth and generating passive income.
The goal of building wealth is to grow your nest egg so that you can eventually retire comfortably. To do this, you need to reinvest your dividends to purchase more shares of stock, which will increase in value over time.
The goal of generating passive income is to create a stream of income that does not require active work on your part. To do this, you need to invest in dividend-paying stocks that will provide you with a consistent income stream.
It is important to remember that dividend payments are not guaranteed. While most companies have a long history of dividend payments, there is always the potential for a cut. This could lead to a significant decline in income, which could make dividend investing a risky strategy for some investors.
The goal of building wealth is to grow your nest egg so that you can eventually retire comfortably. To do this, you need to reinvest your dividends to purchase more shares of stock, which will increase in value over time.
The goal of generating passive income is to create a stream of income that does not require active work on your part. To do this, you need to invest in dividend-paying stocks that will provide you with a consistent income stream.
It is important to remember that dividend payments are not guaranteed. While most companies have a long history of dividend payments, there is always the potential for a cut. This could lead to a significant decline in income, which could make dividend investing a risky strategy for some investors.
FAQ
Q: Where do I start with dividends?
When it comes to dividends, you must first understand this form of investing and make sure it aligns with your financial goals. You will want to get to grips with terminology like dividend rate and dividend yield - this is the percentage of the stock price that you will receive as a dividend.
A good place to begin is by looking at the companies that make up major country indices like the FTSE 100 in the United Kingdom and the Dow Jones Industrial Average (DJIA) in the United States. These are large, well-established companies that have a track record of paying dividends. From there, you can research the individual companies to find the ones that best fit your investment criteria.
A good place to begin is by looking at the companies that make up major country indices like the FTSE 100 in the United Kingdom and the Dow Jones Industrial Average (DJIA) in the United States. These are large, well-established companies that have a track record of paying dividends. From there, you can research the individual companies to find the ones that best fit your investment criteria.
Q: How long do I need to own a stock to get dividends?
If you want to receive dividends from a stock, you must buy the stock a minimum of one day before the ex-dividend date and maintain your position until the market open on the ex-dividend date. So, if you purchase a stock on the ex-dividend date or later, you will not receive the next dividend payment.
Q: Is a dividend a good investment?
The appeal of dividend investing is that it is a way to receive income from your stock investments without having to sell any shares. This can provide you with a source of income during retirement. Additionally, dividends can be reinvested, offering a proven way to grow your wealth over the long term. However, dividend stocks still carry risk and may not be appropriate for all investors.
