Dividend stocks are shares in a company that pay a dividend to shareholders in order to share its profits – a reward to them for investing in the company.

To get the dividends, you just need to own stocks in the company.

Why Invest In Dividend Stocks?

Buying dividend stocks is a great way to obtain a passive income from your stock portfolio. The cash you receive from the dividends is automatically paid into your brokerage account. You can withdraw it to spend, or use it to buy more shares – in which case your portfolio will increase significantly over many years because of compounding.

Dividend stocks tend to have lower volatility which makes them less risky (although not completely without risk, as with all stocks).

Dividend stocks provide two sources of return: regular income from the dividend payments and capital appreciation of the stock price.

How To Buy Dividend Stocks

You buy a dividend stock in the same way as purchasing any other stock. Here are the steps involved in buying dividend stocks:

Open a brokerage account

If you do not already have an account with a broker you need to open one. It is an easy and quick process and can be done online; you simply need to provide proof of your identity to comply with the ‘know your customer’ rules.

Dividend investing is not as intense as more active forms of trading such as swing or momentum trading, so you just need a broker that lets you buy and hold stocks rather than actively trading them. Most online brokers are suitable for this passive investment strategy.

Fund your account

Once your brokerage account has been set up you need to fund it, by transferring money into it. This can be done using a bank transfer, or with a credit or debit card.

Choose your dividend stocks

Researching which stocks to buy becomes simpler if you use a stock screener. Most online brokers will provide a screener that lets you filter for stocks that pay dividends. You can also use ADVFN’s FilterX or the ADVFN AI chatbot. Find out more about stock screeners here.

You should obviously look at the dividend yield, which tells you how much a company pays out in dividends each year relative to its stock price. Other factors to consider are:

• Industry or sector – does it match the type of companies you want to invest in?
• Market capitalisation – how big the company is.
• Company fundamentals – look at its past performance to check if it has a solid future.
• The company’s relative risk.

You should also do some wider research on the company you are interesting in – look for news relating to the company or the sector it operates in.

Buy the stocks

You instruct your broker to purchase the stocks, as you would for any other type of stock, using the money in your brokerage account.

Monitor your stocks

You will need to keep an eye on the performance of the dividend stocks, just as you would any other stock positions. Check the overall performance of the stocks. Other things to be aware of:

• Make sure dividends continue to be paid.
• Check if the dividends are increasing.
• Assess the company’s ability to pay dividends from company earnings, rather than using its cash reserves or other resources.

Receive the Cash

Now you can sit back and wait for the money to roll in. Dividends are usually paid quarterly, to any shareholder who owned shares before the cut-off date, known as the ex-dividend date.

How to Compare Dividend Stocks

When choosing which dividend stocks to invest in, it can be helpful to compare several stocks to assess their performance against each other. Here are some of the factors to consider when comparing dividend stocks:

Investing in Dividend ETFs

As well as buying shares in individual companies, you can invest in dividend companies by buying an ETF.

ETFs (exchange traded fund) are managed funds that select high-yielding dividend stocks for the benefit of the investors. If you buy an ETF you don’t have to choose individual dividend stocks for your portfolio, instead one purchase gets you a basket of shares. The dividend payments are still paid into your brokerage account.

Advantages and Disadvantages of Buying Dividend Stocks

FAQs

1. How do you make money with dividend stocks?

Shareholders make money from dividend stocks in two ways: Income, which provides a predictable source of income from regular dividend payments, and growth (capital appreciation) where the stock price goes up in value over time.

2. How long do you have to hold a stock to get a dividend?

To receive a dividend you need to be on record as a shareholder at least a day before the ex-dividend date.

3. Are dividend stocks a volatile investment?

Dividend stocks are affected by the overall rise and fall of the markets, like any stock, so they are vulnerable to periods of volatility. However, in general they tend to be less volatile than non-dividend stocks, partly because those who invest in them tend to be buy-and-hold investors rather than active traders.

4. Can beginners invest in dividend stocks?

Yes, dividend stocks are a good pick for beginners because they provide a steady passive income which compounds over time and is a solid method for building wealth. They are generally held for a long period so don’t require the constant buying and selling activity of other trading strategies.

5. Can you buy stocks just to get the dividend?

Yes, there is a strategy called dividend capture, which involves timing your buying and selling of a stock to get the dividend. However, it’s not as simple as that because typically, on the ex-dividend date, the stock price will fall so you need to wait for the stock price to rise again to its previous position (or higher to cover any fees involved) before selling.

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The information provided in this article is for informational purposes only and should not be construed as financial, investment, or professional advice. The views expressed are those of the author and do not necessarily reflect the opinions or recommendations of any organizations or individuals mentioned. Always consult with a qualified financial advisor or other professionals before making any financial decisions. The author and publisher are not responsible for any actions taken based on the content provided.

GET STARTED

Free and unlimited demo account
Over 2,800 CFD instruments are available for trading on the Plus500 CFD platform
Min Deposit: $100

Disclosure: 80% of retail CFD accounts lose money. Plus500 does not offer spread betting, social trading, or bonds. Furthermore, hedging is strictly prohibited on the Plus500 CFD platform.