Discover how to begin investing in dividend stocks.
Table of Contents
We review all suggested products and services on our own. If you click on the links we share, we might get paid. Find out more.
Investing in dividend-paying stocks or funds that offer dividends is a smart way to earn extra money from your investments. These stocks can grow steadily over time, adding to your overall portfolio. This guide will explain how to include dividend-paying stocks in your investment plan and discuss the advantages and drawbacks of this type of investment.
How to Buy Dividend Stocks
Purchasing a dividend stock is just like buying any other stock. First, you need to open an account with a brokerage firm. Then, you research the dividend-paying stock or fund you’re interested in and buy it through the broker’s online system. It’s that easy!
Steps Required to Buy Dividend Stocks
Purchasing a dividend stock is just like buying any other stock. First, you need to open an account with a brokerage firm. Then, you research the dividend-paying stock or fund you’re interested in and buy it through the broker’s online system. It’s that easy!
Here’s how it works:
Step 1: Open a brokerage account. Opening an account is simple and can be done online without depositing funds immediately. Dividend investing is less intense than other trading styles, so most online brokers work well for this passive strategy. It involves buying and holding positions rather than active trading.
Step 2: Fund your account. Once the investor’s account is approved and set up, they must add funds. They can do this by transferring money from a bank account using an ACH transfer, wire transfer, or check or transferring funds from an existing investment account.
Step 3: Choose your stocks. Picking dividend stocks or funds is simpler now with stock screeners offered by many online brokers. Investors can use these screeners to find and filter dividend-paying stocks based on the desired dividend yield.
When considering dividend stocks, comparing their dividend yield to interest rates and other stocks in the same industry is essential. Once you’ve found some good dividend-paying stocks, consider the type of companies you want to invest in, like their industry or sector. Other factors to consider include the company’s size, risk level (you can use Beta to measure this), stock price charts, and technical data analysis for medium- to long-term prospects.
Step 4: Monitor your stocks. Monitoring dividend stocks is much like watching any other stocks you own. You’ll want to track your stocks’ performance overall, including the performance of different sectors and industries in your portfolio. It’s important to ensure that the dividends you expect to receive are paid out regularly and, ideally, increasing over time. You should also evaluate if the company can sustain its dividend payments using earnings rather than dipping into cash reserves or other resources. This involves analyzing factors like earnings quality, debt levels compared to equity, and other fundamental indicators.
Step 5: Receive your dividends. A customary practice among equity shareholders involves the dispersion of dividends every quarter. This process encompasses four significant junctures: the pronouncement event, the ex-dividend day, the registry day, and the remittance day. The pronouncement event unveils the quantum of dividend disbursement along with the ex-dividend and remittance dates. The ex-dividend day marks the inception of stock trading sans dividend remuneration to the stock possessor. Following this, the registry day ensues, transpiring on the trading morrow post-ex-dividend day, serving as the delineation for stock possessors eligible for dividend accrual. Ultimately, the remittance day signifies the actual disbursement of dividends to stockholders.
What You Need to Open a Dividend Stock Account
Personal Information
Like other stock trading accounts, brokers need specific personal details to open a dividend stock account. These include your name, Social Security number (or taxpayer ID number), address, email address, date of birth, and a government ID like a driver’s license or passport.
Financial Information
Brokers will also ask for your financial details, such as net worth and income, to follow the Know Your Client (KYC) rules. This helps them decide if opening a trading account is suitable for them.
Opening a trading account to grow wealth and earn income is a common reason and is typically approved if your personal information is correct.
Compare Some Top Platforms for Investing in Dividend Stocks
| Company | Fees | Account Minimum |
| Fidelity | No fees for stock and ETF trades, and no fees plus $0.65 per contract for options trades. | $0 |
| Interactive Brokers | Equities and ETF trades have $0.00 commissions on IBKR’s TWS Lite platform. For active traders needing advanced features like order routing, costs are scaled by volume. Options trades on TWS Lite are $0.65 per contract, which is also the base rate for TWS Pro users, with rates adjusted based on volume. Futures contracts are priced at $0.85 per contract. | $0 |
Types of Dividend Investments
Dividend investment options include buying individual stocks, high-yield mutual funds, ETFs, and dividend appreciation funds and ETFs. While all these options involve purchasing dividend-paying stocks, mutual funds and ETFs are investment funds that buy multiple dividend stocks for their investors.
Individual Companies
Investing in individual companies that pay dividends is a straightforward way to include dividend-paying stocks in your portfolio. With this approach, you choose which companies to invest in by researching and deciding on your own. Usually, there are no extra fees, especially since many online brokers offer free stock trading. However, as the investor, you’re in charge of all decisions and need to stay updated on your investments by researching and monitoring your positions regularly.
High-Yield Mutual Funds and ETFs
High-yield mutual funds and ETFs are professionally managed funds that invest in high-yielding dividend stocks on behalf of investors. Instead of picking individual dividend stocks, investors rely on these funds to do the work for them. Investors still receive dividends either as cash or by reinvesting them to buy more fund shares. While most funds pay dividends every three months, some pay monthly. However, there are fees for these funds, which can affect their overall performance. Investors must consider whether these fees are worth paying compared to managing dividend stocks.
Dividend-Appreciation Funds and ETFs
Dividend-appreciation funds and ETFs are similar to high-yield mutual funds and ETFs. However, the stocks chosen by professional managers for these portfolios have regularly increased their dividends. Just like with high-yield funds, investors should consider the fees associated with these funds before making a decision.
Compare Some of the Top Dividend Stocks
| Company | Forward Dividend Yield | Payout Ratio |
| Frontline PLC (FRO) | 29% | 0% |
| Two Harbors Investment Corp (TWO) | 19% | 58% |
| Genco Shipping & Trading Ltd. (GNK) | 18% | 73% |
Factors to Consider When Opening a Dividend Stock Account
Fees: Fees play a big role in trading accounts because they affect how much money you make from your investments. Thankfully, many brokers now offer commission-free trading for individual dividend stocks, so there’s no cost involved. Even if you’re trading with a commission account, the fees for trading individual stocks are usually very low. However, most dividend investors prefer a broker that doesn’t charge commissions for buying individual dividend stocks.
When investors opt for mutual funds or ETFs to invest in dividend stocks, they should pay attention to the fees and expense ratios these funds charge. These fees can affect how much money you make from your investments. Generally, ETFs have lower fees compared to mutual funds.
Account minimums: Many online brokers no longer require a minimum amount to open an account, but some mutual fund companies may have minimum investment requirements. However, commission-free online brokers allow investors to access various dividend mutual funds and ETFs.
Research and trading tools: Research is crucial when choosing dividend stocks for your portfolio. Look for a broker with a reliable stock screener and access to comprehensive fundamental and technical information about companies and industries to help with your research.
Regarding trading tools, features like conditional orders for managing profit and loss and the ability to trade from price charts are useful but not essential for dividend investing. This approach usually involves buying and holding stocks for the long term, so less active trading tools are okay. This article discusses the advantages and disadvantages of a passive buy-and-hold strategy.
Customer service: Having reliable customer service is valuable when choosing a broker. While investing in dividend stocks is straightforward, beginners might need help with tools like stock screeners and automatic reinvestment options. Some brokers offer live chat and phone support, but response times vary.
Security: Ensuring the security of your trading account is crucial. Look for brokers that offer two-factor authentication to enhance security. While most brokers have protection through the Securities Investor Protection Company (SIPC), some offer additional coverage through Lloyd’s of London insurance policies. This extra protection is essential for investors with accounts exceeding SIPC coverage limits.
FAQs
1. How Are Dividend Stocks Taxed?
Ans: Dividends on a tax return are divided into qualified and unqualified. Ordinary dividends are the usual payments made by stocks and mutual funds from a company’s profits. They can be qualified or unqualified. Unqualified dividends include payments from stocks not held for a required period, dividends from certain companies like REITs and mutual funds, and dividends from employee stock option plans. To qualify as a dividend, the stock must be held for a specific period, usually 61 days out of 121 days, starting 60 days before the ex-dividend date.
Unqualified dividends are taxed like regular income, based on the tax filer’s overall income and tax rate. Qualified dividends are taxed at lower rates, similar to capital gains tax rates, which can be 0%, 15%, or 20%. In 2023, for individual tax filers, qualified dividends are taxed at 0% for taxable income up to $41,675, then at 15% up to $459,750, and at 20% beyond that. For married couples filing jointly, the tax rates are 0% for income up to $83,350, then 15% up to $517,200, and 20% beyond that. However, there’s a tax penalty for married couples filing jointly if their combined income exceeds $459,750.
2. Are Dividend Stocks the Same as Dividend Funds?
Ans: A dividend stock is one stock that pays dividends, while a dividend fund is like a collection of many dividend-paying stocks bundled together in a mutual fund or ETF. People who invest in dividend funds can either reinvest the dividends to buy more shares of the fund or ETF or take the dividends as income. You can also take the dividends as income if you own individual dividend stocks. Some individual stockholders can join a Dividend Reinvestment Plan (DRIP), which automatically uses the dividends to buy more shares of the same stock.
3. Are Dividend Stocks a Volatile Investment?
Ans: Like any other stock, dividend stocks can go up or down depending on the market. They can be affected by market ups and downs, but they’re usually less likely to swing wildly than stocks that don’t pay dividends. People who invest in dividend stocks usually plan to hold onto them for a while, aiming for steady income instead of quick trading. When choosing dividend stocks, looking for companies with strong cash flow, steady earnings over time (between 5% and 15%), and not too much debt compared to their equity is helpful.
4. Who Should Invest in Dividend Stocks?
Ans: For those aiming to grow their wealth over many years, adding dividend stocks to their investment mix is a smart move. This strategy has been trusted for a long time as a way to build wealth steadily. Dividend investing remains popular because it gives you regular income, grows over time, and helps protect against rising prices better than bonds do
