Building a solid portfolio of income producing stocks takes time and patience but can definitely pay off over time. The process of dividend investing can prove to be very beneficial for you and your portfolio. It is a special investment strategy that is based upon building a collection of safe blue chip stocks high dividend yield that generate income throughout the year. Properly investing can diversify your portfolio and provide you with a residual source of income. A dividend investing strategy can offer a more competitive return on investment in low interest rate environment.
Here are few important tips that every dividend investor should consider while entering the market and investing in dividends.
Consider Dividend growth:
High yielding stocks are the most attractive thing for dividend investors but they should always consider the dividend growth rather than just focusing only the dividend yield. These high yielding stocks are made up of income trusts, real estate investment trust and high yielding companies. They should understand that a company which is continuously increasing its dividend by 10% every year with low yield could potentially be better than a company which has a high current yield for example of 10%.
Dividend history plays an important role in dividend investing. It helps the investors to know about company’s history and gives the hint for investing in future. On this basis Investors can predict the future of a company’s performance and can make safe investment. Investors should focus on the dividend allstars as it will be good place to start.
Invest Wisely In Dividend Stocks:
It is a good point to consider for all the investors. They should know that there are two types of stocks such as non-dividend paying and dividend paying stocks. Try not to overpay for dividend stocks. By using price-to-earnings ratio and future price-to-earnings calculations you can get a sense if a stock is too expensive or not.
Generally, most of the dividends that you receive from your stock investments will be taxable. Even if you plan to reinvest your dividends you still have to pay the taxes. It will be counted as an income in the year in which you receiving it. Consulting a tax specialist can be also a good step for investors, in order to handle the tax issues.
You might have heard analyst’s talking about diversification. Diversification is considered as an important thing for dividend investors because they should not limit exposure to one particular industry, but should own stocks of different industries.
Company’s Dividend Payout Ratio:
Another important thing that investors should pay attention is the companies Dividend payout ratio. The dividend payout ratio is helpful to tell the investors that how much of a company’s earnings are being used to pay the dividend to current shareholders.
A dividend reinvestment plan (DRIP) is good strategy that reinvests dividends as you get them. When you receive a dividend, you can reinvest and buy more shares. This will result in a quickly growing portfolio. Therefore, the more you use this method, the bigger your portfolio can be. You can setup a Dividend Reinvestment Plan either through your broker or directly through the company you are investing in. This plan automatically reinvests dividends into more shares of stock. It can compound the return on your investment and can help investors build wealth.
Consider the Source:
When you choose a company to invest your money you should consider the source from where the money is coming from your dividends. You can take examples from many companies that pay out monthly dividends. They are holding companies with several different streams of revenue. By focusing the source you can find a well-diversified company that has traditionally paid out a dividend.
There are many successful investors who use the dividend cut as their number one rule for selling a stock. When a company cuts its dividends it may consider the right time to sell a stock. Dividend investors should consider those companies for building their portfolio that are growing continuously.
Watch The Ex Dividend Date:
Ex dividend date is an important date while you are buying a stock for the dividend payment. It is the date on which the shareholders need to own the stock to capture the dividend. If you buy a stock after the ex dividend date you do not receive the dividend for the particular period.
Putting It All Together
One of the best forms of passive income is investing in solid blue chip dividend paying companies. The investors can get the opportunities to build wealth by investing in these companies. Dividend investing also promotes dollar cost averaging and can give a potential for higher return on investments. It is generally paid on a monthly, quarterly and or annually basis. Investors should always look for companies that have a consistent solid cash flow. Thus dividend investing strategy may not take a lot of money but can be an important step in building personal wealth.