How To Start Dividend Investing? [2021]

How To Start Dividend Investing? [2021]

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If you’re interested in having money coming in on a regular basis, like magic, without having to actively work for it, then you’re definitely going want to learn about how to start dividend investing. Passive income as it’s better known is one of the most sought-after ways to earn money. Dividend stocks and funds provide this and more. Be sure to also watch my YouTube video below for more information in regards to getting started in dividend investing.

What is a dividend?

A dividend is a way that a large company can share its earnings with shareholders. 

So, for example for every one share you own in the company, they will pay you out a piece of their profits over the course of a year.

The Dutch East India Company was the first recorded public company to pay regular dividends. They paid annual dividends of around 18% per share over their 200-year existence. I wish they were around today because that’s a really nice yearly payout!

Here are some very important key dividend investing terms and definitions you need to know:

Declaration date – simply the date that the board of directors at a company announce their intention to pay a given dividend

In-Dividend date – the last day, which anyone holding shares will receive a dividend and if anyone sells that shares that day will lose their dividend.

Ex-dividend date – this is one day after the in-dividend date, if you sell your shares on this date you are still entitled to the dividend.

Record date – shareholders registered in the company’s record as of the record date will be paid the dividend

Payment date – everyone’s favorite day, the day in which dividend payments are made to the shareholders.

Choosing a dividend stock

When analyzing a dividend stock, do not look at the stock’s dividend payout alone. Always make sure you’re investing in a great company first, that is either stable or has future growth potential as well. Make sure the stock purchase price is at a value proposition that makes sense. You don’t want to purchase a dividend stock in a company that is about to go under or potentially have a major drop in its stock price. Start with great companies, then look at their current dividend, their dividend payout history and dividend growth streak. For example, Coca Cola has been increasing its dividends for the past 50 years. That’s an impressive streak. If you want to learn more about stock market investing please check out my YouTube video below.

Dividend Funds & ETFs

For more information in regards to Mutual Funds and ETFs, click on the link to the SEC guide.

Another good way to reduce risk is to invest in a low-cost exchange-traded fund (ETF) that offers exposure to many different companies all in one fund that you can purchase. So instead of purchasing a single stock, you buy the ETF. Because the ETF is composed of a collection of different stocks, if one stock within that fund decreases their dividend or even drops in value, the remaining stocks within that fund can hopefully compensate for that drop. A better way to say this is that an ETF provides diversification and less downward risk due to the overall fund composition. Investing in an EFT is also a more passive way to get dividend exposure without putting all your money into one company. Some examples and not investment suggestions of dividend ETFs include VYMI from Vanguard with a 5.12% dividend & FIDI from Fidelity with a 5.9% dividend as of this date.

If you’re looking to put together a dividend portfolio today you’re going to need an investment brokerage platform to purchase your dividends stocks or funds. I have two amazing options for you. I’ve done all the hard work for you and I’m recommending two amazing options. One of them is Webull and the other is M1 Finance. Webull is more for the active individual active stock investors, where M1 Finance is more the set it and forget it type of investor. Both offer $0 trade commissions, mobile applications and amazing trading options. Please try Webull or M1 Finance today.

#1 Rated Robo Advisor & Dynamic Portfolio Rebalancing

#1 Rated Robo Advisor & Dynamic Portfolio Rebalancing

The M1 Finance investment, retirement account and technology are simply amazing. They even offer dynamic re-balancing, full customization and even some pre-built portfolio options called expert pies. M1 Finance is a strong recommendation for your automated investment and retirement needs. Try them today with only as little as $100 to start investing.

M1 Finance custom pies

#1 Rated Investment Brokerage Platform

#1 Rated Investment Brokerage Platform

Today it is easier and cheaper than ever to purchase stocks. Some of them offer completely $0 cost trades and you can do this straight from your mobile phone. My personal recommendation is Webull. It offers all the above plus some of the most amazing stock and fund information at your fingertips. The platform is free so download it today and give it try.

Webull App Phone

SECURITIES INVESTOR PROTECTION CORPORATION (SIPC) protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. Click here to learn more information.

Passive income with dividends

Most people want that dividend dream, where they’re sitting back drinking cocktails on some tropical beach, earning passive dividend income to cover all of their lifestyle needs and expenses.  I’m going to come out and maybe burst your bubble here. That is not going to be the reality for many people who plan on earning income from dividends. It is simply not realistic out of the gate, but you could potentially get there over time. What is more realistic, is to produce a smaller amount of income, somewhere between $500-$2000 per month. 

How to calculate dividend earnings?

The formula is to calculate dividend earning is really simple. Let’s say you want to produce $24,000 a year of passive income with dividends. You would divide your income by the dividend percentage so let’s say you have a company that pays a 5% yield. With this calculation, you would need $480,000 invested to earn $2k every month in passive dividend income. 

INCOME/DIVIDEND = PRINCIPLE

$24,000/5% = $480,000

So like most people you probably don’t have $500k sitting around to kick-off your dividend investment portfolio. If you do though, then all the power to you, that’s great! If you don’t there are options. Remember I said you can get there with a plan. A possible plan and strategy could be using the DRIP strategy.

DRIP or Dividend Reinvestment Plan

Before we dive into the DRIP method it is important that you understand compound growth, interest and dollar-cost averaging. Please be sure to watch by YouTube videos below on both compound interest and dollar-cost averaging.

If you use dollar cost average or add to your investments on a regular basis and you also use the DRIP method you could potentially see your dividend investments start to skyrocket. This is because now you’re adding exponential growth to your investments that could over time grow to potentially to millions of dollars over a given period of time. This occurs because you not only take into account the potential appreciation of the security over time, the actual stock and fund, but you keep reinvesting the dividend back into the principle, causing that amazing compounding growth effect. Some individual companies and even your brokerage accounts could offer dividend reinvestment plans or DRIPs. DRIPs allow shareholders to use dividends to systematically buy small amounts of stock, usually with no commission and sometimes as a slight discount. In some cases, you don’t even need to pay taxes on this.

Here is a link to my free dividend investing calculator to help you put together your dividend investment strategy today. I’m offering the same exact calculator I use for my dividend investing, no strings attached, absolutely free for you to download. So download it today and start putting together your dividend investment portfolio plan.

Dividends and taxes

Finally, we’re going to talk about everyone’s favorite but necessary topic, taxes. The dividend received by a shareholder is the income of the shareholder and may be subject to income tax. The tax treatment of this income varies considerably between jurisdictions. So please consult a tax professional if you have any questions in regards to this. 

By the way I build in the dividend tax calculation as part of my free dividend investment calculator, to make it even easier for you to put together a clear investment plan and strategy.

Dividends could be subject to taxation. Please click the link to the IRS website for additional information.

Summary

Dividends are a great way to earn a passive income. They are also a great way to integrate dollar cost averaging and compound growth principles to allow some amazing appreciation of wealth over time.

Are you considering investing in dividends? Are you already investing in dividends? Please share your thoughts about dividend investing in the comments section below.

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Frank Makrides

Frank Makrides

Is a former financial technology industry executive, licensed realtor, real estate investor, an award-winning speaker, has been published, holds multiple patents and is passionate about all things personal finance and entrepreneurship. He is also a proud husband and father of 2 amazing children.

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