September 28, 2018

How (And Why) to Invest in Dividend Stocks

Written By Mary Beth Eastman
Last updated September 28, 2018

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Different types of stocks have different levels of risk and return. Of the many types of stocks you can choose from, it may be worthwhile to invest in dividend stocks. Many investors choose dividend stocks for long-term investments because they require very little maintenance and tend to show decent growth over time.

Dividend stocks work by giving you a portion of the earnings of a company whose stocks you own. The more dividend stocks you purchase from a particular company, the more potential for cash earnings.

There are essentially two types of dividends:

Cash Dividends

These are paid out first to the company’s owners, and then to the common stockholders.

Special One-Time Dividends

This type of payment occurs when a special event in a business occurs, such as a sale or liquidation, or litigation win.

While it may not pay out much at first, as you continue to grow your dividend stock portfolio, you can amass a great sum over many years. The key, therefore, is to continually reinvest in dividend stocks if you are seeking to grow your wealth long-term with little risk.

Additionally, dividend stocks pay out on a regular basis. Investors will receive either a check or have the money directly deposited into their accounts. You can also have the money sent to your broker to be invested in your brokerage account.

There is less risk with dividend stocks because they don’t rely primarily on capital gains. They tend to fall less than other types of stocks during poor market conditions. Additionally, a company that pays out dividend stocks is typically well established and more reliable, making it a safer investment. Therefore, even if the stock market isn’t doing well, the company may continue to prosper.

There are many different strategies that can be used to invest in dividend stocks—you must decide which method you prefer.

Investing in Dividend Stocks That Have Above-Average Yields

If you are seeking to maximize your income, you can simply pick dividend stocks that have the highest yields. However, this entails more risk than other dividend stocks, as payouts can decrease if company earnings decrease. If you are reliant on a specific amount of income from your dividend stocks, this may be too much risk for you.

Investing in Dividend Stocks With a Strong Growth Track Record

If you aren’t relying on the investment for income, this may be the best method. Over the long-term, companies with a strong track record can consistently provide a good return on your investment.

There are of course other ways to invest in dividend stocks—speak to a financial advisor or explore some of the best online investing sites to learn more before making any decisions.

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