Dividend investing is a particular stock trading strategy, which essentially focuses on investing in companies and make your money work for you. Instead of attempting to time the market and make a quick buck in the short term, dividend investing is all about the long game. This strategy requires you to pick and choose stocks that pay out cash to shareholders on a regular basis for reinvestment. It’s how I go about making money and I’m going to show you why you should consider it too.
It’s not for everyone, however. Here’s a quick-fire list of advantages and disadvantages of dividend investing:
- Create a passive source of income.
- Take a share of a company’s profits.
- Compound at a faster rate than savings.
- Better positioned to weather any storms.
- Maintain or increase your purchasing power.
- Subject to tax (unless in a tax-free account).
- Dividends are not guaranteed.
- Risk of dividend cuts.
- High dividend yield leads to increased risk.
Why invest in dividend stocks
Investing is all about making money by providing someone else with your funds, expecting a return. Buying shares of a company allows you to part with some cash to then sell that portion of the said company at a later date. It’s good when you can make a profit, but a large portion of people attempting to trade lose money, especially when day trading (or “short selling”).
This is why I like dividend investing. It’s different from normal trading in that we’re not focused on the market price of companies, not unless we’re buying into them. While it’s always important to analyse whether a company is under or over-valued, with dividend investing the aim is to invest at a steady rate and cost average over time. Throw some money at your favourite company picks, sit back and watch the income stream in.
The beauty of this approach is that one is shielded against unfortunate turns in the market. It’s great to take profit should I eventually sell off my shares, but for a long-term dividend investor, I’m in it for the long game. Buying while stocks are low and high put me in a better position overall, especially when I’m likely to take in dividend payments even during a recession.
And these small dividend payments add up over time. £3 from one company. £20 from another. After considerable investments, you’re looking at £1,000 and above each year. The goal is to replace my income with dividend payments so I can retire early and enjoy life to its fullest. It requires large sums of money upfront and there’s always the chance I’ll lose everything, but it’s a dream that’s easy to make a reality.
How to get started
In order to become a dividend investor, you’ll need to open an account with a brokerage firm. I use Trading 212 (clicking this referral link will bag you a free share once you sign up and deposit at least £1), but you can use whoever you find most appealing.
Once you’ve done that, it’s time for research. You’ll need to look into all the various companies you wish to invest in. Here’s how I did it:
- Note down all my favourite companies.
- Remove ones that do not pay dividends. (Using tools like Seeking Alpha and DividendMax to find out.).
- Analyse each stock to view important metrics.
- Buy some shares in each of them to diversify my portfolio.
- Keep track of all my shares with my free dividend tracker.
- Profit. Quite literally.
Just remember the golden rule: don’t fall for the high dividend yield trap. This is when a company’s dividend yield is considerably high and you pick up some shares to take advantage of this blessing. All is well and good until the company isn’t able to maintain the said payments.
It’s important to remain focused on the long-term end goal. We’re looking to create passive income with companies we trust, believe in, and are performing well. A lower yield that’s set to increase over time with higher stability is a far better choice.
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