How To Invest In Dividend Stocks In 2020

A $100 stock which pays its shareholders two dividends of 2.5% each year, for example, still has a dividend yield of 5.0%. The only difference is that the dividend payment is distributed two times a year, as opposed to one.

The dividend yield is essentially another stream of income. However, the dividend yield is about as passive as an income stream as investors will ever see. Outside of owning shares, all investors need to do is sit back and collect the dividend yield.

Dividend Stocks Vs. Dividend Funds

Dividend stocks are simply equities traded on all of the major indices, not unlike traditional stocks. Investors will invest in dividend stocks to capitalize on both growth and dividend yields. There are a lot of dividend stocks traded on Wall Street, and it’s not easy to choose between them all.

Traders who know how to conduct their research and are comfortable making their own investment decisions are free to deploy their cash in whatever way they see fit. Investors who are less familiar with their dividend stock options have another opportunity: dividend funds.

Otherwise known as dividend mutual funds, dividend funds operate in the same way as their traditional mutual fund counterparts. Instead of investing in just any equities, dividend funds only invest in stocks that pay dividends. If investors aren’t comfortable picking their dividend stocks, or they simply prefer a more passive approach to investing, they can invest in a dividend mutual fund.

Dividend funds are run by professional money managers and tend to prioritize established stocks with high dividend yields. Anyone who pays into a dividend fund can expect someone else to distribute their capital amongst several dividend stocks. When all is said and done, these funds serve as a “middleman” for investors looking to invest in dividend stocks. Any dividends the shares earn will first be distributed to the fund, which will then return the dividends to the investors (after taking their fair share of course).

Is It Worth It To Invest In Dividend Stocks?

Far too many investors don’t appreciate dividend stocks for what they are: wealth-compounding machines. Instead, many investors are quick to write off dividend stocks as boring, low-return equities. It’s true: most dividend stocks don’t have the same allure as today’s best growth companies. Admittedly, dividend stocks don’t look as exciting as small-cap companies with unlimited growth potential. Nonetheless, investments don’t need to be exciting to make money. Truly great dividend stocks can simultaneously provide shareholders with decades of growth and annual income.

Dividend stocks are worth the investment for those who are looking to capitalize on compounding returns and passive income. Even a small investment in a dividend stock now can compound over years and improve returns without investors lifting a finger. Executing a DRIP (dividend reinvestment plan) strategy will have investors reinvesting their dividends back into growing companies and creating intrinsic value with little to no effort.

The greatest benefit of dividend investing occurs when share values rise. Even if the dividend remains the same, the growth of the company (and the value of its shares) will increase the dividend yield. Or, as Investopedia so eloquently puts it, “if a company keeps a dividend payout ratio constant, say at 4%, but the company grows, that 4% begins to represent a larger and larger amount. (For instance, 4% of $40, which is $1.60, is higher than 4% of $20, which is 80 cents).”

It is important to note that the same dividends investors covet also limit the upside of their respective shares. While dividends can be a great source of income, the simple fact that the company is distributing dividends means the growth of the respective stock is limited. In other words, money that could be spent on growing the company is instead returned to shareholders.

How To Evaluate Dividend Stocks Before Investing

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Disclaimer: The information contained herein was pulled from third party sites. Although this information was found from sources believed to be reliable, FortuneBuilders Inc. makes no ...

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