Earn Regular Income from Stock Investing Via Dividends

Investing for dividend income is a time-honored strategy that can prove lucrative for the individual investor. The investor must commit to monitoring his or her investments carefully to avoid big losses. Dividend investing can work very well not only as a retirement plan but as a way to build steady income.

Steps

Choosing Stocks that Pay Dividends

  1. Research stocks that that have a history of paying steady dividends. You can find this information in the Saturday edition of the Wall Street Journal where the stock quotes have a "YLD" caption. The number found in this column is the annualized percentage rate. Other sources include Morningstar's DividendInvestor, the online newsletter Dividend Detective and weekly updates in the Value Line Investment Survey that can be found at your local library.[1]
    • The dividend yield is not the same as the dividend rate. The dividend yield is a percentage based on a calculation of annual dividends divided by the current price. The dividend rate is the total amount of money you can expect to receive from an asset over the course of a year.
  2. Invest in stocks that pay a high dividend regularly. Buy stock in companies that have generated good profits over a five year period and have a history of paying consistently high dividend. Companies that are still rapidly growing may reinvest earnings in order to promote further growth, but mature companies such as 3M, Coca-Cola, or Procter & Gamble issue dividends as a way to encourage investors to buy stock.[2]
    • Let’s look at AT&T, for example. Recently a share of AT&T sold at $24.83 and paid a dividend of 40 cents a share every three months. An investor buying 1,000 shares at that price would have spent just short of $25,000 to acquire those shares but would have received in return $400 quarterly per share in addition to any price appreciation on the stock (which you could expect from a company you invested in after diligent research). If AT&T's dividends remain steady, in ten years they would pay the stockholder $16,000 in dividends.
    • The board of directors can choose to raise or lower a company’s dividends. That’s why you want to choose a stable company with a solid history of paying rising or at least consistent dividends.
  3. Research other factors. Aside from making sure the company pays high dividends, there are a few other important hallmarks of a strong company worth your investment.
    • Invest in a company that has a lower debt load (liabilities) than its peers or its industry average. This offers the flexibility to borrow if needed to support operations and a dividend. This information can be found on the company's balance sheet in their annual report.
    • Look up a company's earnings per share. This can be found in the annual report on their website. Then compare it to its dividend per share also found on the annual report. The company's dividend per share should be no more than 80% of its earnings per share. If a company earns $0.25/share and is paying a dividend of $0.50/share, for example, this is not a sign of good financial health.[3]
    • Check a company's current ratio. This is the ratio of current assets to current liabilities and it measures its ability to meet short-term obligations. This can be found on the company's balance sheet in their annual report. You want to invest in a company that has a lot of cash. If a company's current ratio is greater than 1, it's in good financial shape.[3]
  4. Purchase the stock. You can do this by setting up an online trading account with sites such as Scottrade, OptionsHouse, Motif Investing and TradeKing. Be sure that you are aware of any transaction fees or percentages that will be charged before you decide on a site to use. You could also work with a stockbroker in a large investment firm such as Fidelity or TD Ameritrade.[4]
  5. Calculate dividend yield and track it over time. This is the annual dividend divided by the current stock price. For example, if stock ABC had a share price of $50 and an annualized dividend of $1.00, its yield would be .02 or 2%. This information can be found on the company's website. Don't select a stock based solely on dividend yield. The yield may only reflect a momentarily low stock price, which could be the result of a company's temporary problems. Pay more attention to their long-term dividend trend.[5]
    • A company with a history of paying a consistently growing dividend is best. Next-best is a company that pays a steady dividend. Be wary of an outfit that has had to cut its dividend. That doesn't mean you should avoid it completely. Just look at it closely before you buy.
  6. Calculate the dividend coverage ratio. Take the company's 12-month net profit and subtract the dividend paid on irredeemable preferred stock shares. Then divide it by the last 12-month dividend on ordinary shares(or expected annual dividend). This information can be found on the company's annual report on their website. A company with a ratio of 1.0 or better is generally considered "safe," and a 3.0, for example, means that a company has enough earnings to pay dividends amounting to 3 times the present dividend payout.[6]

Managing Your Investment Funds

  1. Spend much less than you earn. Pay yourself first. In other words, devote as much of your income to investing as you possibly can, but not more than you are earning. You'll want the investments to return substantially more each year than you need to spend so you can reinvest in more stock.
    • For example, if you earned $2,000 in a year in dividends from your stock investments, don't spend more than approximately $1,800 on buying new stocks.
  2. Keep up to a year's worth of living expenses in cash and money market funds. This isn’t just for an emergency fund. It will help smooth out the ups and downs of your investments. If they don’t return as much as you’d like for a quarter or two, your emergency money will give you some breathing room.
    • For example, if you determine you spend $50,000 per year for living expenses (not including funds for stock trading), keep another $50,000 in the bank or in a higher interest money market account for emergencies.
  3. Roll the excess back into your investments. Whenever you start to build up more than a year’s worth of expenses, roll the excess into additional investments. Take care to track your spending so you'll be able to estimate the next year's expenses. If the amount in cash and money market funds gets over fifteen months' worth of living expenses, cut it down to twelve months, and put the difference into more investments.
    • For example, if your living expenses are $50,000 per year or $4,166 per month, once you accumulate $62,490 you will have $12,490 to spend on stock trading. This assumes your living expenses will not increase the following year.
    • Consider setting up a retirement account. Depending on your age and financial situation, set up a traditional IRA or a Roth IRA and start contributing.[7]
  4. Keep detailed records. An Excel spreadsheet will be most helpful in tracking all your stock purchases. Here you can record prices paid for stock, dividend yields, prices your stock sold for and any other information you will need for tax and planning purposes.
  5. Prepare a monthly cash flow budget. This will detail all your expenses, both fixed and variable, and projected revenue from dividends and other sources. Then you will be able to see if your revenue will cover all of your expenses each month and how much you will have as profit to reinvest.

Tips

  • An added bonus is that dividends are generally taxed at a lower rate than interest income.
  • For the most part, you don't need to worry about the stock price. All you care about is the dividend. As long as dividend payouts remain reasonable, it doesn’t matter how much the stock will sell for. You intend to hold it for a very long time. In fact, you'd like to see low prices on many stocks, because you're always looking for a bargain. You can buy more dividend-paying stocks in a low market and get more shares for your dollar.

Related Articles

Sources and Citations

  1. ↑ http://www.investopedia.com/ask/answers/07/dividend_stocks.asp
  2. ↑ http://www.investopedia.com/ask/answers/12/why-do-some-companies-pay-a-dividend.asp
  3. ↑ 3.0 3.1 http://www.marketwatch.com/story/how-to-pick-the-best-dividend-paying-stocks-2013-05-02
  4. ↑ http://online-stock-trading-review.toptenreviews.com/
  5. ↑ http://www.thesimpledollar.com/2008/10/27/earning-regular-income-from-stock-investing-via-dividends
  6. ↑ http://accounting-simplified.com/financial/ratio-analysis/dividend-coverage.html#formula
  7. ↑ http://www.rothira.com/traditional-ira-vs-roth-ira
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