Difficulty: Moderately Easy
Things You’ll Need:
- Brokerage account
- A couple hours a week for research
Step1
Understand what dividends are and how they work - When a company earns a profit, it has essentially two options of what to do with that extra money. They can either reinvest it (by hiring more people, upgrading machinery/software, paying out higher bonuses etc), or it can distribute this profit to their shareholders in the form of dividends. It begs the question - just why would a company wish to pay dividends then? The simple answer is that a company that consistently pays dividends shows that it is a financially healthy, profitable company, which in turn will attracting more investors and spur growth.
Step2
Understand the benefits of dividend investing - The obvious advantage is that you can expect a consistent source of returns every quarter, similar to earning interest on your savings account (but often at a much better rate!). Because dividend-paying companies tend to be larger and more financially stable, their stock will also tend to be less volatile, meaning the stock price will probably not move very drastically. You are not likely to lose too much capital value (i.e. buy high sell low), but at the same time you shouldn't expect too much in terms of capital gains (you probably won't sell too much higher than you bought).
Step3
Understand the risks of investing for dividends - It is completely up to the company whether or not they will pay dividends in any given quarter, so your expected payout might disappear at any time. It is not common for companies to just stop paying out dividends for no apparent reason, but if the payments are 'one-offs' from leftover budget from a given project, or if there are significant changes in the market (example: the mortgage crisis!), dividends can be reduced or cut altogether. And obviously, you are still holding stocks, so you are exposed to price fluctuations and will still want to pay attention to the other risks of owning stocks.
Step4
Picking the stock - Given the profile of companies that pay dividends, the best picks will most often be large caps. Here, the same principles than investing in stocks for capital gains apply - study the industry to get a sense of whether things are looking up and times are good, study competitors, and study the company itself (I suggest checking out my other article "How to Pick Stocks" for tips). In short, you will want to feel confident that external factors won't hinder profitability of the company in the long term (example: higher gas prices, lower dollar affecting costs), that your company of choice isn't being driven out of the market by competitors (example: toshiba HD DVD), and that it is being well run and that you have a positive impression overall of the service it provides.
Step5
Research the dividend payment history itself - You can find this information in any financial reporting website. How long has the company been paying dividends? Has it been growing consistently? What is the payment per-share comapred to its direct competitors? Has it ever reduced/cut dividends? If so why? Have earnings been growing at a similar pace as dividends? Once you can answer these questions, and feel satisified with the comapny's outlook, you can be confident your dividend-paying stock will make you some nice returns every quarter.
Select High Paying Dividend Stocks
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