How to Invest in Dividends
Looking for a solid investment tool? Before you venture into the market, you will be given a lot of advice – some of it will be helpful, while others will misguide you. Don’t follow guidelines blindly, because it is important you understand them first.
For example, say you want to invest in dividends, and ensure that they yield cash payments at a later stage, you have to ensure you get the basics right:
- Stocks that pay dividends are actually sharing the profits of the company with investors. People tend to concentrate on the rise and fall in share prices, since they want to capitalize on the rise in share value, rather than generating payment from a dividend. If you are a dividend investor, your long-term goal is to receive income from it and not make a profit on the increase in share prices.
- Are you willing to take some risks? Sometimes volatile companies, shell out higher dividend yields to catch the attention of investors. While higher-dividend paying stocks can be added to your portfolio, it is suggested that higher-quality stocks usually generate a more stable income stream.
- How often does a stock pay dividend? Annual, semi-annual, and quarterly dividends are quite common. If you need a steady cash flow, the frequency of payments becomes extremely important.
- Capital gains and dividends should be reinvested whenever possible. Automatic reinvestment plans are available in the case of some stocks, but several companies don’t provide any reinvestment schemes. You need to keep reinvesting dividends, so that your share ownership grows.
- The market volatility should hamper your long-term objectives. For instance, if you wish to generate income on a regular basis, the stock’s dividend payment history assumes more importance than share price history. On the other hand, focusing on the dividend payment stream instead of share price means you need to consider the investment during market downturns.
- The financial health of companies in your portfolio always has to be monitored since your income depends on them. If you notice that a particular company is deteriorating economically with no signs of improvement, you might have to think about selling off shares and plow your money somewhere else. However, it is best to be prepared that dividend amounts are subject to change since fortunes of companies keep going up and down. These fluctuations might cause a problem with your dividend payments, but that is the minimum risk you need to take.
Your portfolio should be diversified so that there are several sources of income rather than just one or two. A company that is faltering can stop or reduce dividend payments drastically, but if you have additional sources of revenue, there is no need to worry at all.