Best Dividend Paying Stocks – The Key to Building Wealth
Congratulations on your decision to start building a portfolio of dividend paying stocks!
Owning stocks that pay dividends may not be as exciting as other investments like trading options or chasing high growth stocks. However, building a solid portfolio of dividend paying stocks is a great way to build wealth over time. A portfolio of blue chip stocks that pay a dividend can provide a steady stream of income for years and years.
Whether you are an experienced investor or are just beginning, there are plenty of details offered here on investing in dividend paying stocks. Take a look at the section below on How to Start Investing below to get started.
How to Start Investing
Following these simple but important steps can help guide investors build a solid dividend portfolio.
1 – Stock Market Education
Before you place that buy order for your first share of stock, it is important to fully understand how the market works. For starters, check out the definitions and financial ratios on the Stock Trading 101 page. There you can find out more about dividend paying stocks and the overal market.
2 – Setting Investment Goals
Wanting to invest in dividend stocks and being able to invest are two different things. Before you can even think of investing, you must make sure your personal finances are in order. For example, how much credit card debt do you carry? Wouldn’t it make more sense paying off your existing debt at a higher interest rate before investing? You may be excited about investing, but you need to make sure it is the best way to manage your money.
It is also important to set some investment goals. How much do you reasonably want to earn in dividend income your first year. Where do you want to be in 10, 15, or 25 years? The answers to these questions can help you plan your investment strategy.
Here is an example of the dividend income goals my wife and I set during our first year of tracking our portfolio – XXXXX.
3 – Searching for the Best Dividend Paying Stocks
Once you have a decent understanding of how the stock market works, you will need to develop a set of criteria to identify dividend paying stocks. The most important thing to remember here is that not all dividend stocks are created equal. While a double digit yield may sound tempting to most investors, there are probably many red flags surrounding the potential buy.
Check out my stock screen criteria used to identify the best dividend paying stocks.
Investors can also look to many dividend paying stock lists that are published by industry experts. Here are a few of the important indexes where you can start finding the top dividend paying stocks.
- Dividend Aristocrats Index
- Dividend Achievers
You can also checkout my income stock holdings to see what I am buying and selling.
4 – Funding Your Portfolio
So now that you have set your goals and know what stocks to buy, how are you planning to pay for your purchases? You should have thought about how much money you think you can invest when you setup your goals. Where are these funds coming from? Can you afford to invest more each month? Do some brainstorming and figure out logical ways you can fund your portfolio.
Check out this article on – How to Fund Your Dividend Income Portfolio.
5 – Learn How to Buy Stocks Online
If you are a small investor like myself, then commissions and fees can take a huge percentage out of your potential returns. For example, a $10 brokerage commission to buy 10 shares of stock at $50 accounts for 2% of your investment. If the stock you just bought pays a 2% yield – your dividend profit is wiped out the first year.
While it is hard to avoid all brokerage fees and commissions – limiting them puts more of your money to work. Investors are at an advantage with all the competition amongst online stock brokers. When you go to pick a online broker, make sure to compare several different options and make sure they provide the services you are looking for as an investor.
Here is a guide to some of the online brokers that I have used.
Anthoner option to limit costs is to buy stocks directly from the company or a third party agent. These are called Direct Stock Purchase Plans and they can save you a lot of money on commissions and fees.
6 – Managing Your Portfolio
Managing a dividend income portfolio should not be as time consuming as an investor who buys and sells stocks in the short term. This does not mean you should ignore your stocks and let them go.
Another important management step is to determine if you want to reinvest your dividends. Most brokers allow their investors to reinvest dividends back into additional shares of stock which has many advantages to a small investor. Dividend Reinvestment Plans (or DRIPs) can be a great way for investors to start earning compounding interest.
7 – Knowing When to Sell
Most experienced investors will tell you that hardest part about investing is knowing when to sell a stock. Picking stocks is the easy part but knowing when to sell and following through is a different story. Even though the focus of a dividend investor is to buy and hold stocks for the long term – there are times when it makes sense to sell.
Every investor needs an exit strategy, just as they have a method for picking stocks.
Check out this article on – How to Know When to Sell a Dividend Stock.