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Investing in Dividend Paying Stocks

· Finance

Investors are increasingly understanding the power that is available to them by trading in their own online trading accounts and avoiding the fees associated with using an investment broker such as TradeDAX and TradeFxAsia, or included on mutual funds. Many investors are doing this through investing in index funds.

While index fund investing is increasingly pursued due to the market pacing it provides to investors, many people are concerned with the potential bubble that it causes and the impact it can have on your portfolio.

Thankfully, there are other investing strategies that provide you with stability in your portfolio and allow you to avoid the pitfalls of index investing. One of these strategies is dividend income investing.

What is Dividend Income Investing?

Some stocks pay dividends to investors that they can use to support themselves financially or can plow back into buying additional stocks, allowing them to compound their return. Generally speaking, more stable companies with reliable revenue sources tend to pay dividends and focusing on companies that pay out a portion of their income.

There is more to owning dividend-paying stocks than simply choosing companies with the largest dividends. Investors should look to how stable those dividends are over time and how well they are covered by earnings. Companies with stable earnings histories, and with higher earnings than dividends, can potentially increase their dividends.

Some investors only seek out companies that increase their dividends each year. They then reinvest these dividends in the dividend paying stocks or in other dividend-paying companies in an investing style known as dividend growth investing. The point of this strategy is an ever-increasing stream of revenue that grows similar to a snowball rolling downhill. Once it reaches a critical mass, barring a lack of diversification or a market meltdown, you should have a diverse source of income.

Benefits of Investing in Dividend Paying Stocks

For investors who focus on dividend investing, there are a few major benefits that they realize. As noted above, dividend stocks tend to be more stable than other investments and are good for providing a reliable source of income that can replace or supplement your wages.

Since stocks tend to increase their dividends with earnings growth and inflation, they make for a better and more reliable source of income for those in retirement and for longer periods of time.

Risks of Dividend Investing

Dividends can be cut at any time and have a diverse set of investments help to protect yourself from market risk. Since certain industries like utilities and real estate trusts pay the highest dividends, you may find yourself with a lack of stock diversification with this strategy.

However, there are other risks as well such as opportunity risk which is the risk of lost investment opportunities. Many startups don’t pay dividends and there is the potential for lost returns by ignoring these younger companies with the power to have truly magnificent returns.

Using an Online Account to Invest in Dividends

Online brokerage accounts provide many great tools for investing in dividend-paying stocks. Some offer dividend reinvestment plans (drip) which automatically reinvest dividend for an account holder which takes market timing out of the equation.

Online trading accounts also allow you to more effectively track your dividend income and your cost basis. Because of the frequent dividend reinvestment under drip plans, it can be hard to track your stock basis. An online trading account can make it much easier to do so.

Online trading accounts are efficient vehicles for dividend investing strategies and allow you to have lower commission costs that let you use more of your money to invest in more dividend stocks.

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