‘Money’ is the reason why many people start investing in stocks. Some people make money from trading stocks and some people make money from investing for long-term. When it comes to long-term investments, there are two ways to make money – capital appreciation and money through investing in dividend stocks.
Most investors are familiar with ‘buy low and sell high’ – a core principle of value investing. Capital appreciation is to buy an asset at a low price and wait until the price goes up. The difference in the buying and selling price is capital appreciation. But, the second method of making money is not very common. In fact, most beginner investors ignored this method of making money from stocks.
In this guide, we will guide you, how to make money through investing in dividend stocks?
How to Make Money with Dividend Stocks?
Dividends are profits distributed by a company’s board of directors to the shareholders. If you are planning for financial independence with the goal of early retirement, the dividend payments flow into your account can help you in pay to achieve financial freedom and accomplish goals like pay household bills, mortgages, start a business, travel around the world, and manage money to send your kid to college.
However, in the process of making money through investing in dividend stocks, you need to consider a lot of things and plan your investments as per your goals. Following approach can help you understand how one can manage to make money through dividend stock investments.
Search for Companies
The very first thing you must consider is to search for companies that offer dividends on stocks and has a fairly good chance of increasing dividend payouts over time. To do so, you need to perform stock analysis and monitor the past performance of a company. If the company has the potential to grow with time, you can see more dividend money flow into your account while investing in that company’s stock.
Check out for blue-chip stocks or companies that show remarkable growth, strong balance sheets, and a long history of paying consistent dividends over the years. Once you find the company checkout for payout ratio. It means, how much percentage of income company pays in dividends.
Trick: The lower the percentage, the safer the dividend and the faster the dividend grow over time.
Decide the Stock
Now it is time to invest in such stocks that offer high and consistent dividends. But, have you decide, how much stock you want to buy? – No! Well, you should. Because if you are looking for individual stocks, you need to consider diversification but if you are thinking to try out investing in ETFs then it is okay!
However, it would be recommendable to build a portfolio of individual dividend stocks that offers a high yield compared to dividend ETF.
The plan is to hold the stock even when the share price is down. As long as the company decides to maintain the dividend rate, you will get annual or monthly dividend payout even when the share price is down. You are not here to make money from capital appreciation so panicking in case of share price fall will not benefit you.
That means, you can be patient and maintain your stock until the share price recovers.
An investor can increase wealth manifold by reinvesting the dividend in buying the shares of the same company to multiply dividend payments over the years. Generally, the company issue dividend payments either in cash or stock. Unless you sell the shares, you can reinvest the dividend money by increasing your no. of shares.
Following the same approach in long-term can bring fruitful results to you and help you in achieving financial independence which you always longed-for.
Hope, this article helped you in understanding the ways to make money through investing in dividend stocks. Nevertheless, if you have any doubt or wanna contribute then please don’t forget to mention in the comment section below.