Small Business Brief

Financial Services

How to Invest in Dividend Stocks: A Guide for Beginners

Investing in dividend stocks is one of the best ways to diversify a portfolio and boost a bank account. And buying long term dividend stocks has been lauded by financial kingpins like Warren Buffet

But it isn’t always easy to know how to invest in dividend stocks. 

We’ve got you covered. We’ve laid out the basics for investing in dividend stocks.

Here is a guide for early investors trying to tap into the magic of dividend stocks:

What are Dividend Stocks?

Dividends kind of work like a bonus for people who own certain stocks. Some companies use these dividend stocks to reward shareholders with a part of its profits. It works as an incentive for people to own and invest in a company.

But not all companies give shareholders a dividend.

In fact, corporations that offer dividends are usually well-established. That means groups like penny stocks or startups probably won’t offer a dividend right away.

Companies that encourage dividend stock investing might offer cash dividends or stock dividends.

Like the name suggests, cash dividends are paid out as money to the investor. In most cases, the investor is paid quarterly. And they usually earn a set percentage of money based on the number of shares they own.

Some companies also hand out stock dividends to shareholders. Instead of just giving out a check, these corporations pay investors with more shares of the company. 

That can be a big advantage if a company grows in value. As shares stack up and value increases, an investor can use a solid company to compound wealth.

But it’s important to know that dividends are not guaranteed or mandated. The board of directors of a company usually decides whether a dividend should go out to shareholders.

They also have the power to pick how much money is divvied out or if a dividend should be cut altogether.

That means it’s a good idea to have a grasp on how to invest in dividend stocks before jumping in.

How to Invest in Dividend Stocks

Even companies that offer a dividend can run into trouble, slash dividends, or even go bankrupt. That means it’s good to be choosy when investing in dividend stocks. 

One good thing to look at is a stock’s profitability. Simply put, the investor should pick companies that are making money.

But a solid dividend stock will also show growth and a plan for future gains. This isn’t just to increase the odds the company will keep giving a dividend in the future. It also is something investors look at when picking where to put there money.

And adding investors can be an important part of a stock’s value.

Finally, it’s a good idea to pick up established names. If the company has paid out dividends for several years, there is a better chance they will keep giving out dividends in the future.

And investing in solid value stocks can be a good way to protect a portfolio if the market goes south.

Locking Down Funds for Dividend Stock Investing

This guide should help new investors know how to invest in dividend stocks. But profitable investors will have a solid plan for locking down money for investing.

We can help with that too. Check out our top budgeting tips here for expert insights every small business owner should know.