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.