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How to Invest in Dividend Stocks
Dividends are paid by stable, mature companies. They provide a steady stream of income. Perhaps you are interested in investing in dividend companies. Are you wondering how to do this? There are several options you have to invest in dividends and create a portfolio.
One option involves constructing a portfolio of individual stocks. This can be done through an online brokerage account. You open an account and purchase shares of the stocks you wish to own. It is recommended to have a dozen or more different companies in the portfolio to provide proper diversification. Many people invest in twenty to fifty companies.
The drawback to this option is that it is not cost effective for someone wanting to invest small amounts of money. The brokerage costs to buy small amounts of stock shares could be too high compared to your portfolio's return. You may pay costs to reinvest your dividends as well. This varies from broker to broker. For someone with a large amount to invest, this may be your best option. You can purchase your stocks one time and then hold them with no more costs until you sell. Either take your dividends in cash, or use a broker that does not charge to reinvest dividends.
There is an alternative that helps small investors. This option is to invest a small amount directly in companies that offer DRIPs. DRIP stands for direct reinvestment plan. These plans let you invest a little each month to purchase shares of stock. You can slowly build a portfolio this way, adding other company DRIPs as you have the money.
DRIP plans differ from one company to another. Some companies charge no fees to manage their reinvestment plans. Here you can continue to purchase new shares with your dividends and allow all your money to go to work for you. Other companies charge initial account set- up fees. Still others charge additional fees. The less fees paid, the more goes to work growing your portfolio. But you do want to be diversified. Therefore, you may have to pay some fees to include a diverse array of companies in your portfolio.
Not every company offers DRIPs. Another option is to invest in a dividend-focused mutual fund. You can take the dividend distribution or reinvest it. These funds are like any other mutual fund. You pay fees for the operation of the fund. You can read the prospectus to see which companies are included in the fund you are considering. Many funds focus on a specific dividend strategy such as companies with high yield or companies that have growing dividends.
One drawback to a fund is the fees you pay every year. It is wise to choose the lowest cost dividend funds. Plus, you will have to accept the companies that the fund has chosen. But this is a good option if you wish to invest small amounts on a regular basis.
The last option is an exchange-traded fund (ETF). ETFs are well-diversified like mutual funds, but they can be bought and traded like stocks. They have very low cost operating fees. The main drawback is for small investors contributing small amounts regularly. ETFs charge a commission to purchase them, so regular purchases can really raise your fees. But many brokerages will waive the commission if you are purchasing their sponsored ETFs.
You have many options when choosing to invest in dividend-paying stocks. Which option you choose depends on your personal circumstances and preferences. You will want to shop around and do some research before you choose an option.
May I recommend my ebook, available on BellaOnline: Investing $10K in 2013
Kindle Edition Available on Amazon: Investing $10K in 2013
Content copyright © 2014 by Sandra Baublitz. All rights reserved.
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