Famed Berkshire Hathaway investor Warren Buffett once said, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
Why would an investor want to hang onto his stocks for so long when the internet has made day trading easier and more convenient than ever before? For many investors, the answer is dividends. Dividends are payments made by a corporation to its shareholders, typically as a form of profit sharing. The payment of dividends is not required by law, but many companies choose to pay stockholders a portion of the money earned as either a cash option or through a reinvestment plan. Dividends can be paid out on a quarterly, annual, or biannual basis—it all depends upon the specific policies put into place by each individual corporation.
Dividend-paying stocks can be a great long-term investing strategy. Use our step-by-step guide to add dividends to your portfolio today.
Why Do Some Companies Pay Dividends?
Dividends are the most visible and direct way that corporations can share profits with stockholders. This makes dividend payments attractive to high-income investors—especially if the stock is rising, the company is producing a reliable product and investors see long-term potential in the sector, product, or management team.
These ideal investors are often retirees who are looking for a reliable source of income for themselves now and as an investment for their children and grandchildren.
If a corporation can attract these types of investors through dividends, the situation is win-win; the investor receives a cut of the company’s profits, the company gets positive PR and a cash injection to reinvest in the company.
How To Invest in Dividend-Paying Stocks
Step 1: Research quality stocks with low volatility
If you’re looking to collect dividends from your stock purchases, you’ll have to think big—big business, that is. Large corporations with a long history of financial stability and low volatility are the most likely to pay out dividends because they are more likely to be in a position where enough capital is stored to handle market fluctuations and keep day-to-day operations running in the event of a bad quarter or two.
Make a list of large companies that you’d like to own a piece of—a great place to start is to think about corporations which produce products that you use in your daily life and whose mission you believe in.
Some of the current highest dividend-payers on the market include the Apple Hospitality REIT, Equinix, and the Apple Corporation.
Step 2: Read the stock’s quote
You can learn more about the dividends a stock pays out by looking at a stock’s quote. A quote is a summarization of all the major information you’ll need to know before you invest.
Free stock quotes can be found by searching for your stock of choice’s ticker on most of the internet’s top providers of stock and financial news, including Google Finance, Yahoo Finance, and NASDAQ.com.
Search for your stock’s quote and look for the information labeled “dividend” or “annualized dividend.” This will show you how much money the stock paid out per-share last year to investors. If your quote does not include information on dividends, the stock may not currently be offering profit-sharing to investors.
Still searching for the perfect stock quote site to bookmark? Check out Benzinga’s roundup of free sources for stock market quotes.
Step 3: Purchase the stock through your broker of choice or directly through the company
Once you’ve found a stock, you’ll need to purchase the stock either through a broker or directly through the company. To get an idea of which companies offer direct purchase programs, you can browse through the database run by ComputerShare, the largest provider of direct stock purchase currently in use.
It’s important to note that when you purchase stock directly through a company, you may be required to make a minimum investment between $25 to $500, depending on the corporation’s policies and the price of each individual share.
If you don’t want to make a minimum investment or the stock you’re looking to purchase is not currently offering direct purchase options, you’ll need to open an account with a brokerage firm to facilitate purchases for you. There are a large number of brokerage firms operating online, each with their own set of minimum account balances, commissions, fees, and research tools. To learn more about choosing a stockbroker, take a look at our summarization of the best brokers currently online.
After you’ve opened an account with your broker’s help, you can request a buy through your brokerage firm’s website or mobile platform. Your broker will facilitate the transaction and you’ll become a partial owner of the corporation whose stock you’ve bought.
Step 4: Reinvest your dividends through the company’s DRIP
You have two options when it comes to collecting your dividends: a direct cash payment or a reinvestment into the company through a dividend reinvestment plan (DRIP).
A DRIP will automatically reinvest your dividend payments into more shares of stock on payday. If you’d like to enroll in your stock’s DRIP, contact your broker. If not, you can choose to have your dividends deposited into a checking or savings account directly through your brokerage account.
Step 5: Track your dividends
Companies are not required to pay their shareholders dividends—this means that a corporation can choose to raise, lower, or eliminate dividends at any time. Track your dividends through your brokerage account and consider selling your stock should dividends fall to a threshold that’s below your needs.
Though dividends may seem like a massive incentive for investment, even very successful companies may choose not to pay out dividends if they believe that they can better increase stock value by retaining earnings.
Dividend payment should not be considered a holistic picture of how fiscally healthy a corporation is—a stable company may choose to withhold dividends to branch into a new sector or product, and a failing company may pay out dividends to project an illusion of success to attract new investors.
Keep up-to-date with a corporation’s movements and innovations, and you’ll ensure you’re getting the most for your money.
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