How to Make Money With Dividend Investing

Difficulty: Moderately Easy

Instructions

Things You'll Need:

an online brokerage account
an Internet connection

Step 1

stock certificate - Image by ifindkarma

Dividend investing requires a stock brokerage account. I recommend signing up for an online discount stock broker, such as ShareBuilder or Scottrade. After signing up and funding your account, you'll be able to invest in dividend stocks.
Step 2

google - Image by dannysullivan

Your next task is to choose the dividend stocks in which you want to invest. Generally speaking, you are looking for stocks that offer a dividend yield between 4 and 7%, and have good fundamentals (we'll talk more about this later). You can use Google Finance to determine a stock's dividend yield and evaluate other statistics that will be of use to us.
Step 3

dividend and yield

Let's take AT&T, a popular dividend stock, for example. AT&T's ticker symbol is T, so go to the Google Finance website, enter 'T', and press 'Get quotes'. On the far right of the quote, you should see "Dividend" and "Yield". The value under "Dividend" is the current dividend amount paid per share, every 3 months.
Step 4

At the time of this writing, AT&T's dividend is $0.40 and its yield is 5.83%. The stock price is currently $27.04. To get the yield, Google Finance just multiplied the quarterly dividend by 4 to get the yearly dividend and divided by the stock price ($0.40 * 4 / $27.04 = 5.83%). So, what does all this mean? It means that, for every share of AT&T stock we buy, we get 5.83% of our money back over a year. Not only this, but like any other stock, your shares of AT&T stock will still be earning capital gains... so the 5.83% is like an added bonus!
Step 5

Let's look at another example. Suppose that, over a period of several years, we purchased 1,000 shares of AT&T stock. Assuming it continued to pay dividends at this rate, we'd be earning $1,600 per year in dividends alone. That's an extra $133 a month that you are earning, basically for free (because the money you've invested will still be growing)!
Step 6

What's the catch? Fortunately, there isn't one. In fact, it gets better. Dividend stocks have traditionally outperformed non-dividend stocks over time. So not only have you increased your monthly income, but you've also wisely invested your money for the future!
Step 7

Assuming AT&T performs at a market average of about 8%/year, you'll be able to sell your 1,000 shares of stock for $126,000 in 20 years!
Step 8

Now, we shouldn't pick just any stock that yields between 4 and 7%. There are lots of "bad" stocks out there which pay high dividends. We want stocks which we believe will stick around for a while and continue to pay high dividends.
Step 9

So let's get back to what I meant by "good fundamentals" in Step 2. There are countless selection criteria by which we can judge a stock. Some of the ones I like to look at are ROE (return on equity), institutional ownership, and recommendations by professional industry analysts.
Step 10

In general, we want a company's ROE to be greater than the industry average. Taking our AT&T example, we can look on Google Finance under "Key Stats & Ratios" for the information we need. There is a field labeled "Return on Average Equity", which is currently at 12.16% annually. Now, the only question is, "How do we find the industry average ROE?"
Step 11

dividend stock details

To find the industry average ROE, we have to dig a little deeper. Click on "More ratios from Thomson Reuters" and you'll be taken to a more in-depth analysis at reuters.com. Go down to where "Return on Equity (TTM)" is listed. There will be values for the company, industry, sector, and the market index (S&P 500, in this case). From here, it's easy to compare the company's performance to its industry's. You can even look at the 5 year average ROE, for a more long-term indication. In this case, AT&T is outperforming the industry in all time periods.
Step 12

dividend stock institutional ownership

Going back to the main Google Finance page for AT&T, we can easily get a percentage for the institutional ownership. This number should be higher than 40% or so. Higher institutional ownership numbers give us greater confidence in our stock, as we can be sure that many finance professionals agree with us that the stock is a good investment. At this time, AT&T's institutional ownership is at 58%.
Step 13

dividend stock news links

Finally, we should look for other clues, like analyst recommendations, late-breaking news, etc. There are links to the latest news and analyses on the Google Finance listing for a stock. If you don't find any terribly negative news, and the stock has passed all our other tests, then that stock is probably a safe investment! Use all resources available, and you'll be well on your way to earning some extra income through dividend investing, all while building a healthy, diversified investment portfolio!

Comments

LauraLG said

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on 1/17/2009 Nice article. Smart Money had an interesting article this month on how quickly you can double your money JUST based on the dividend returns on these kind of stocks. Under 10 years for quite a few... Good stuff!