Best Way to Invest in Dividend Stocks – An Investors’ Guide

By Advisorymandi
20-September-2018 9:59:12 AM

Many stock market investors tend to invest in dividend stocks to get the benefits of the steady income and use this opportunity to reinvest dividend amount to purchase additional shares of stock. Investing in the dividend-paying stock works out like any passive income source where it becomes a great asset for investors who are looking for regular income. A company who is paying dividends out of profits considered financially stable, the stock prices tend to increase over time while investors enjoy their regular dividend payments. These companies and firms are often stable and the fluctuation in their stock prices tends to be small.

Thus, many young people looking for a way to generate wealth and build a steady income source by making an investment in dividend-paying stocks. But, unfortunately, not all people are proficient in dividend-based investments. They just don’t know “how to invest in dividend stocks?”

But, don’t worry! In this article, we will help you by providing the right guidance and stock market tips related to the dividend-based investments.


Tips to Invest in Dividend Stocks

The first thing you need to know that there is more to dividend-based investing than simply looking for stocks with the highest yields. Point is, you don’t need to rely on purchasing a single asset class instead you can invest in Dividend ETFs or dividend-focused mutual funds.

Let’s start with the Dividend ETFs.


Buying Dividend ETFs

As you know exchange-traded funds (ETFs) are not so different than mutual funds except ETFs are traded on exchanges. ETFs have transparency and flexibility which attract investors and make them more reliable than portfolios of mutual funds. Hence, people are so interested in it that they prefer to have an all-ETF portfolio.

It is a great investment option for those who are new in the investing world. In simple words, it is a straightforward solution for the people who are looking to do the investment in stocks that pay a regular dividend. Not only it will provide instant diversification but also make sure you get the safety of payout. Unlike a single asset class, you won’t need to rely on a single stock to get your dividends instead, a fund made up of dozens of stocks will make sure you get steady returns even if fund’s some stocks cut their dividends.


How to Buy a Dividend ETF?

First, you need to find a list of dividend ETFs which are only invested in stocks not bonds. Once you finished with that you can check for the few things:

  • Dividend Yield: This is how a company pay out in dividends each year. This usually expressed as a percentage relative to its share price.
  • Time Span: Well anything for 5 years or higher is better.
  • Expense Ratio: It is an important ratio to gauge while investing in dividend ETFs. The lower the better.
  • Stock Size: Dividend ETFs can be invested in companies with large, medium, and small capitalization. This also referred to as large caps, medium caps, and small caps respectively. Even in capitalization, the large-cap stocks are considered as “safest investment” while the small-cap stocks are the riskiest.

Once you analyze all the above criteria then you can go for buying dividend ETF which think would be best to meet your financial goals.


Buying Individual Dividend-paying Stocks

Buying an individual dividend-paying stock is more complicated than buying a diversified dividend ETF. Unlike a dividend ETF, here you will need to analyze the company and industry to check the safety of the dividend and then determine how much to purchase. On top of that, you will not be buying a single stock but a portfolio of stock so you need to extra careful while performing the industry analysis.


How to Buy a Dividend Stock?

First, you need to look for the stocks that pay dividends. Once you finished with that you can start analyzing the company. This is a quite important step, only a healthy company can provide steady dividends for years.

For starters, you need to look for answers to questions like –

  • Where the company stands competitively?
  • Is balance sheet strong enough?
  • How good is the company’s management?
  • Are there any indications of a company’s future growth and earnings?

Next thing you need to consider is the payout ratio. The payout ratio is the percentage of income company pays in dividends. And in our opinion, the lower it is, the safer the dividend. When the payout ratio is low, the possibility of dividend growth over time is fairly good. Once you finished analyzing, all you need to consider is “how much you are planning to buy?”

In a nutshell, with a thorough research, the company’s balance sheet and financial statements, one can know whether a company is paying dividend regularly or not.


Final Thoughts: –

Whenever you plan to invest in a dividend stock, don’t focus too much on highest dividend yields. What matters is the consistent yield for years which can also grow over time. You can choose to invest in any one of those based on your financial goals and risk tolerance.

Nevertheless, if you have ay query or would like to add something then don’t forget to mention in the comment section below. We would be happy to answer all your questions.

Read Also: In Which MF Should I Invest, Growth or Dividend Reinvestment?


Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.

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Author: Advisorymandi

AdvisoryMandi is India's most trusted Stock Market Advisory marketplace covers NSE, BSE, MCX & NCDEX. Invest with confidence and harness the power of AdvisoryMandi to make smarter investment decisions in Stocks, Indices, Commodities, Forex & IPO.

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