Dividend investing is a great way to diversify your portfolio while increasing your return on investment. While this type of investing strategy is promoted primarily to older investors, millennials should give serious thought to how they can benefit from it. Starting early leads to compounding that can increase your chances of achieving your investment goals earlier. Here’s what you need to know about dividend investing.
What is Dividend Investing?
Dividend investing is buying stocks from companies that make regular cash payments to shareholders. The objective of this type of investing method is to attain a consistent income stream in the future.
Before diving into strategy, it’s important to assess if dividend investing is right for you. Here’s what you need to know about dividend investing before you purchase your first dividend stock.
Pros of Dividend Investing
- Less risk than other investing strategies
- Subjected to preferential tax rates
- Many passive investment options
- Provides additional returns on investment
- Potential guaranteed income
Cons of Dividend Investing
- Dividends are taxable
- Cash payouts may vary
- Less potential for high capital gains
- Risk of company deciding to not payout dividends due to market conditions
Dividend Investing Strategy
Here’s what you need to know about dividend investing. It is a long-term investing strategy. The objective is to invest enough to produce a lucrative consistent stream of income that, in the future, will supplement your current 9-5. In more extreme cases people develop a dividend investing strategy that would allow them to retire early and no longer rely on a 9-5 to sustain themselves. Both objectives require the same tips I’m about to share to improve your dividend investing strategy.
- Develop Investing Goals – Know what you want to achieve, when you want to achieve it and the steps you need to take to achieve your goals.
- Automate Your Investment Contribution – Don’t try to time the market. Though capital gains are a plus, your primary objective is increasing your dividend payout over time.
- Reinvest Dividends – Don’t spend all your dividend payouts. Instead, reinvest as much of your dividends as you can. This will allow you to meet your dividend investing goals quicker through the powerful force of compounding.
- Educate Yourself – Learn the language of investing. Then you should spend time educating yourself specifically on dividend investing. Familiarize yourself with the industry and specific companies that you’re invested in.
- Always Pay Your Taxes – Never ignore your tax obligations. Even if you believe the amount is insignificant. The penalty for not paying your taxes can be very costly.
- Invest In Quality Not Quantity – Higher yields do not automatically equal better quality. You want to invest in companies with a good track record and a strong balance sheet. This type of company will almost guarantee you dividends for the foreseeable future.
Thinking about investing but don’t know where to start? Read [6 Common Investment Mistakes To Avoid].
Want to know about investment options out there? Read [Treasury Investments For Beginner Investors].
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