Everything You Ever Wanted to Know About Dividend Stocks And How You Can Earn BigStocks
Money Done Right does not accept sponsorships to promote particular products or services. However, we may receive a commission if you purchase or sign up through links on this page. Here's more information about how we make money.
While the premise of a dividend is relatively straightforward, there’s much more to understanding these investments and maximizing their potential.
We’re here to help you understand the basics of dividends, how you can use dividends to your advantage, and what they can do for your financial future.
Investors are drawn to dividends because they produce long-term, steady payments that are fairly reliable depending on the company offering dividends.
A dividend is a cash payment that is made to shareholders proportional to the number of shares that they hold at the time of the payout, and is dictated by a company’s free cash flow.
Prior to each payout, a company will announce the payout per share that shareholders will receive, and that payout amount is a direct reflection on the financial health of the company.
By owning more shares of a stock, the higher payout you’ll receive, which is why dividends are so appealing to investors.
When you receive a dividend, you can receive the money directly, or you can reinvest your dividends back into the company to purchase more shares.
While the smart move early in your investment journey is to reinvest the dividends to purchase more stock, older investors use dividends to generate steady income.
Reinvesting the dividends is essentially being given stock for free, which in turn generates more dividend earnings at the next payout.
In financially stable companies that pay consistent dividends, those dividend amounts have an upward trend, meaning payouts increase over time.
The longer you hold a stock, and the more stocks you hold within a company that pays out dividends, the more you’ll likely earn over time.
This also indicates stability and safety when it comes to investments.
While short-term volatility can mean quick, massive gains, those gains are often few and far between, and shouldn’t be relied upon when you’re investing in the stock market.
Dividends present the opportunity for stable, long-term growth with a financially mature company, meaning they’re often low risk.
How Often Are Dividends Paid?
The frequency of dividend payouts varies from one company to the next, which often dictates the investor pool for that specific company.
For example, an older investor that is looking for frequent dividend payouts to supplement income may invest in a company that pays out dividends monthly.
On the other hand, someone who is reinvesting dividends may not mind a dividend payout as infrequent as once per year, especially if that reinvestment date comes at a time when stock prices are lower.
Many companies in the United States pay out dividends quarterly, but there are companies that pay out monthly, every six months, or as infrequently as once per year.
Consider your financial goals in regards to investing to determine which company may be right for you.
If you need supplemental supplemental income, a monthly dividend payout may be best for you.
How Much Can I Expect?
Like payout frequency, dividend yields also vary from company to company and industry to industry.
To determine the dividend yield, take the total amount in dividends that a company pays in a year and divide it by the current stock price.
Dividend yields can range from below 1% to more than 10%, so it’s important to research markets and dividend trends before making a substantial investment.
In addition to dividend yields, you should also be aware that there are no requirements for a company to pay out dividends.
A company that does pay out dividends can cut back or completely eliminate dividend payments at any time.
As dividend payouts are a direct indication of the financial health of the company, researching financial information such as cash flow and income statements can give you a good idea of the future of dividends for a particular company.
Declining profits and dividend payouts that are more than annual profits are two sure signs that dividend cuts or a complete elimination may be on the horizon.
Companies that face financial hardship may temporarily pause dividend payments to divert that extra cash into other areas of the business. The funds could be used to bolster up resources and generate more revenue.
After diverting cash flow, it’s very common for companies to resume dividend payouts with even higher dividend payouts than before to retain long-term investors and attract new ones.
A Short History of Dividends
While not every company pays out dividends today, dividends were actually the primary reason that people would invest in the stock market in the early years of the stock market.
During the formative years of the stock market and for many decades after, yields were at historic highs in all markets and industries. A large majority of companies offered dividend payouts to investors during that time.
Then, in 1982, dividend payouts crashed and had a long road to recovery.
Investors turned to stock appreciation rather than income generation. That meant that stocks that were rapidly growing in price garnered the attention of investor money.
Since then, dividends have been slow to recover, but are back on the rise.
The Magic of Compounding Interest
What makes dividend investments so powerful over time is compounding interest.
As we mentioned, companies that pay out dividends are typically very stable and financially sound, meaning they’re more than likely sticking around for years to come.
Compounding interest comes into play when you reinvest your dividend earnings rather than taking a direct payout to use for something else.
Compound interest is interest that is earned on the principal balance, in this case the value of the stocks that were purchased, in addition to the gains on those stocks that are reinvested in additional stock.
While it can be tempting to take your dividends as a direct payout, reinvesting your dividends automatically is the first step in maximizing your dividend earnings.
Maximize Your Dividend Earnings
As we mentioned, the easiest way to maximize your dividend earnings is to reinvest those earnings and purchase additional stock.
By reinvesting your earnings, you’re increasing your dividend payouts over time. This is where the concept of compounding interest comes into play.
In fact, those that reinvest their dividends into additional stock earn much more than those that do not.
Dividend payouts account for a majority of earnings in stocks, and with reinvestment opportunities, you can take advantage of a stable, lucrative investment that is reliable over the course of decades.
To make it easier to reinvest dividends into additional stock purchases, many companies offer dividend reinvestment plans (DRIPs).
These plans allow investors to invest all or some of dividend payouts back into stock purchases, automatically. This makes the reinvestment process incredibly simple and straightforward.
These plans also make it less tempting to use dividend payouts for something else.
When you don’t have to manually reinvest, you have less of an opportunity to pull dividends rather than reinvesting.
In addition to streamlining the reinvestment process, these plans can also reduce or completely eliminate investment commissions, meaning more of your dividend is reinvested.
How to Get Started With Dividend Stocks
Now that you know some of the basics of dividends, how can you get started?
Fortunately, there are many platforms out there that will allow you to invest in stocks without the need for a large up-front investment or to go through an investment firm.
In fact, there are plenty of ways that you can invest in lucrative dividend stocks right from your phone.
Here are three ways that you can get started investing in dividend stocks today.
Here’s why so many people are using Acorns and how you can get started today.
How Does Acorns Work?
Acorns is changing the way that we invest our money.
What was once only available to investors with large up-front capital is now available with those that simply have spare change.
Rather than investing in specific stocks on a per-transaction basis, Acorns links directly to your debit or credit card, rounds up your purchase to the next dollar, and invests that difference in a stock portfolio that aligns with your investment goals.
For example, if you make a purchase that’s $5.50, the total is rounded up to $6.00 and $0.50 is invested in your Acorns account.
The financial experts at Acorns created five investment portfolio options that range from conservative to aggressive.
These portfolios also allow you to invest in dividends, meaning your investments will go even further.
You’d be surprised at how much your spare change can add up, especially if you are a frequent shopper.
If you’re a new investor, Acorns is the perfect way to get started without becoming overwhelmed with the investment process.
In addition to being simple and automated, Acorns charges just $1 per month to invest your money, which is ideal for new investors as well.
Traditional investment brokers charge a per-transaction commission, which can quickly cut into investments.
Rather than paying a per-transaction fee, start out your dividend investments small by installing Acorns.
Similar to Acorns, Robinhood is giving the everyday consumer access to easy, simplified stock investments.
With commission-free trading and hundreds of stocks to choose from, Robinhood is becoming a popular option for new and experienced investors alike.
How Does Robinhood Work?
The traditional commission fees that investment firms charge per transaction often deter new investors from even starting.
Those with low up-front capital or those unfamiliar with the process may not enjoy the commission fees. That might deter them from further planning to invest their money.
With Robinhood, you don’t pay any trading fees and every trade is completely free of charge.
You can start with as little or as much money as you want, as there is also no account balance minimum in order to open a Robinhood account.
While some investment firms require account minimums such as $10,000 or $100,000, you can open a Robinhood account with as little as $10.
If you’re a new investor, Robinhood is an ideal way to get used to the world of investing in the stock market.
Buy and sell using real-time analytics and news briefs right through the app to make your trading experience even more enjoyable.
You’ll find hundreds of different stock options available on the app, including top dividend stock options.
The app allows you to take the dividend payout directly or reinvest it into additional stocks.
In addition to an impressive selection of financial tools and guidance, you’ll get expert dividend investment advice when you sign up for Personal Capital.
Take control of your financial future by signing up for Personal Capital today.
How Does Personal Capital Work?
Personal Capital is a leading wealth management site that provides users with a wide range of financial tools and resources.
Signing up for Personal Capital is completely free, and you’ll be able to track your earnings, expenses, bills, and assets through the dashboard.
In addition to financial planning tools, Personal Capital gives you advice and resources on investments, including dividend investments.
This advice is tailored to your personal financial health. By linking your investment and retirement accounts, the site can provide investment guidance to help make the most of your investment accounts.
Take control of your financial future by signing up for Personal Capital today, and see exactly why we love Personal Capital by checking out 10 Reasons I Love This Free Personal Finance App.
Making Money From Dividend Stocks
There’s a lot to know about dividend stocks, and while it would take hours of research and instruction to master these investments, we hope that this guide has been helpful.
Dividends are on the rise, and more investors are paying attention to dividend payouts as a reliable, stable way of earning additional income and compounding investment growth over time.
This long-term investment strategy can give you the financial freedom you’re looking for.
Have any dividend stock tips that we should know? Tell us in the comments!
Logan is a practicing CPA, Certified Student Loan Professional, and founder of Money Done Right, which he launched in July 2017. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.