Dividend investing is one of the best ways to grow your wealth and your portfolio over time. It's one of my favorite ways to invest, and it was Daily Investing Tip #18.
Dividends are amazing for a few reasons:
- The provide you solid income for owning an asset
- The compound over time, increasing your return
- Dividend paying companies are typically stalwarts in their industries
I'm sure there's more, but let's look at investing for dividends more in depth.
What's a Dividend and Why Does It Matter?
Dividends are profits paid to shareholders of a specific company. Many companies reward their shareholders through dividends. The board of directors of the company can elect to pay a certain amount per share per period. Many companies pay dividends in standard periods of time – such as quarterly or annually. For example, a company could pay a dividend of $1 per share per year. If you owned 500 shares, you would receive a check for $500 per year.
That's a great incentive to invest in dividend paying companies. You're essentially being paid to own a good company – what's not to like? But that's just the start.
One of the many perks of dividends is that you can typically elect to reinvest your dividends, which means you buy more shares of the company with the dividends. This, in turn, allows for bigger dividends, and the power of compounding. This shouldn't be ignored. It's been calculated that dividends have accounted for 44% of the total stock market return for the last 80 years. That means if you didn't reinvest your dividends, you would suddenly see an 8% annual return reduced to a 5.5% annual return. That hurts over the long run!
Finding Dividend Paying Stocks
There are a lot of ways to find dividend paying stocks to invest in. Many of our best investing blogs focus on finding these stocks. The most common way to find these stocks is by screening for stocks. I've walked you through using a stock screener in the past, so if you're not familiar, you can check out my video.
The next most common way is to investing in dividend paying stocks via mutual funds and ETFs. A very popular ETF is the iShares Select Dividend ETF (NYSE: DVY). This fund holds the top dividend paying stocks from the S&P 500, so it pays a great dividend itself.
As you work to build the perfect portfolio allocation, look to include a fund or ETF like DVY in your portfolio.
Things To Watch Out For When Investing For Dividends
However, it's important to remember that investing for dividends isn't always straightforward, and you should just chase the highest dividend paying stocks. There are some times when dividends just don't matter, or they could paint a false picture of the company. Some unscrupulous companies payout extraordinarily high dividends ahead of bad events simply to give investors and owners a payday before the company goes under.
Like any investment, it's important that you do your homework and research on the company before you invest – dividends or not!
Do you prefer to invest in dividend paying stocks?