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Dividend Investing

This article was written by John at BuyStocksOnline. BuyStocksOnline is a site about building a dividend income portfolio with a goal of earning passive income. If you like what you see here, make sure to stop by and check out John’s tips for building a solid portfolio of dividend stocks.

I have been investing in dividend paying stocks for the past 5 years. Over that time, I have learned a lot of things about how to invest for the long term in companies that pay a dividend. More importantly, I have learned a lot about what not to do as an investor.

Now that I am building my portfolio of stocks the correct way, I thought I would share some tips for new investors.

5 Dividend Investing Tips for New Investors

If you want to start investing in stocks that will provide a steady income stream, check out these 5 tips for new investors. Even if you are an experienced investor, you may find these tips helpful. Looking back, I wish I would have known about these tips earlier on in my investing career. Hopefully you can use some of the things I have learned over the past several years.

1 – Don’t Chase High Yields
One of the biggest mistakes a new investor can make is chasing high yields. Take it from me; don’t be tempted by stocks with double digit yields. I made the mistake early on of investing money in only the highest yielding stocks with yields over 15%. Most companies cannot maintain a yield much over 6% or 7% for an extended period of time, so focus on stocks that yield between 2.5% and 6%.

Unless you are investing money into an income trust, avoid stocks with the highest yields. Instead, look for companies with a strong history of dividend growth. A 3% yield may not seem like very much today, but a company that raises their dividend annually by 10% can provide huge returns in the future.

2 – Take Advantage of Automatic Investment Plans
Automatic investment plans (AIP) are a nice option for the small investor looking to build their portfolio one month at a time. An AIP can be setup to deduct money from your checking or savings account every month and use it to purchase stock shares in a company. Most of these plans allow investors to purchase fractional shares by investing as little as $25 per month.

Interested in setting up an automatic investment plan? Consider setting up an ING ShareBuiler account or investing directly through a company. You can no longer make the excuse of not having enough money to start investing with tools like an AIP. For under $100 per month, you can start accumulating shares in a top dividend stock that will eventually add up.

For more information on investing directly through a company, check out What is a Direct Stock Purchase Plan?.

3 – Sign up for DRIPs
A DRIP (direct reinvestment plan) is a good way to build your position in a company by taking advantage of compounding interest. By signing up for a direct reinvestment plan, all dividends received will automatically be invested into new shares of stock usually at no charge. This is a cheap way to make your money grow faster for the top dividend stocks in your portfolio.

Investors with more sizable positions may opt not to DRIP stocks in their portfolio and instead use their funds to purchase undervalued companies. However, small investors like myself can take advantage of DRIPs to maximize their return. I have DRIPs setup on all 12 dividend stocks that I currently own.

4 – Start Dividend Investing Early
One of the biggest lessons that I learned is to start investing sooner. As I approach 40 years of age, I wish I would have started investing in dividend stocks earlier in my life. Like any other investment that earns compounding interest, the sooner you can invest the better off you will be.

Even if you are just out of college, recently married, or just had your first child and cash is tight – you can still begin investing. Take advantage of automatic investment plans or direct stock purchase plans to get you started. It only takes $25 a month to get started.

5 – Look at Dividend History
Which company would you put your trust in? One that has consistently raised dividends annually for 30 consecutive years? Or one that raises, lowers, or even cuts their dividend from year to year? The logical choice is the company that shows consistency.

Most successful dividend investors look for companies with a strong track record of raising dividends. While a company’s dividend history does not necessarily predict the future, there is a good chance the company will continue its trend of increases.

One place investors can look for companies with over 25 consecutive years of annual dividend growth is the S&P 500 list of Dividend Aristocrats.

What other investment tips can you provide to new investors looking to build an income stream from owning stocks?

Crystal’s Comments:  As I’ve written, Mr. BFS invests a bunch for us in dividend stocks.  So far, so good and I like the idea of us re-investing our dividends so things can grow even faster.

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16 comments to Dividend Investing

  • I have a portion of our portfolio in dividend paying stocks. I learned that from my parents after I was in my 40s! Well, actually I learned it from their financial advisor. But that extra income has proven very helpful. I do think most people in their 20s overlook dividend paying stocks because they believe them to be for retirees only (and face it many financial advisors want people to be more active in trading for all the wrong reasons).

  • Great tips. I like the more conservative approach so 1, 4, and 5 peak my interest mucho…

  • John,

    Is it important to set this up in an IRA over a place such as ING Sharebuilder because you will have to pay tax on the dividend income coming in even if it is reinvested? Currently that rate is 15% but with the tax rates not extended this will go up to 39.6% in 2013.

  • At what point financially does a person invest in stocks? After I’ve met my IRA requirement? Before?

  • If the company has a matching point for 401k it can help you when you are just getting started saving too! So much for social security

  • DRIPS and auto invest plans are great. I did a payroll deduct for 1.5 years into a mutual fund that now has over 100k in it.

  • These are really helpful and enlightening tips. As a soon-to-be college grad, I have heard that the younger you begin investing, the more successful you will be in your chosen investments. So, using these tips will definitely aid me in learning how to invest small amounts at the start, that will turn into big investments later on. Thanks!

  • the post is very helping, really very informative. in fact a great piece of share.

  • I got 4 covered, everything I ever read or heard mentioned that the younger you start the better. I started when I was 20 but I wish I had started when I was 18, wasted youth.

    I did not have the money to waste chasing high yields luckily. When I was reading up on dividend investing I thought it was dumb not to buy the stocks yielding 10%. Unfortunately my first purchase had a yield higher than its competitors but I did not realize it has next to no potential for growth and has only gone down since I bought it.

    I wish I had read this a bit earlier but because I have lived it I know that these tips are money.

  • I am really amazed after reading this post, you have a lot of experienced i really appreciate that you have shared this information with us.

  • The really exciting thing to add to this is it actually makes investment easy… provided that you have time on your hands. All you have to do is pick out some big blue chip investments and reinvest your dividends. It actually makes this one of the simplest investment strategies around. :-)

  • There is a story that by investing $100 per month from the age of 20 to 30, and then leaving this until retirement, you will actually amass more through compounding than by starting saving at 30 and continuing until 60. And even better is the fact that you will invest only a third as much!

  • If you want to purchase DRIP you can take help from the brokerages. They allow shareholders to reinvest their dividends at no cost through their plan.

    Dividend stocks

  • Lauryn Lynch

    Thank you so much for sharing all this, I really love to try trading in the stock market and binary options 24option.com are making a scene right now and it seems all over the internet, I just want to ask if this is a legit way to earn more online? Or this is just those scam that won’t help in any way?

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