An investor has many possible ways to make money when investing in the stock market. One way is to derive income from stocks that pay dividends. You can offset stock losses or improve stock gains with companies that pay you over the course of the year for simply investing in their stock. Deriving income from stock dividends takes just a few steps.
Find stocks for your portfolio which pay dividends. Not every stock pays dividends, so you want to be sure to select the stocks that do. When looking at a stock snapshot, look for both the dividend and the dividend yield.
The dividend is the actual amount of money the company pays you per year. The dividend yield is the percentage of the dividend when divided by a company's share price. For instance, if a company was trading at $10 per share and paid a dividend of $1, then the dividend yield would be 10 percent of or 1/$10.
Research the stocks before buying them to make sure that they fit your investment goals. Many investors have gone broke while waiting for dividend payments; for example, if a stock pays a handsome dividend of $5 per share while you own it, but loses 50 percent of its value during that time, you have probably lost a lot of money.
Therefore, research a dividend stock as you would any other stock, comparing p/e (price to earnings) ratios. Make sure that you understand their business model and that they have relatively low debt, and ensure that they are a solid player in their market sector.
Choose to receive the dividends in payment form. When you purchase the stock, or when you set up your brokerage account, you will be asked what to do with dividends. Some investors like to reinvest them into purchasing more stock, while others like to receive the income. For your purposes, select receive the income.
Build your dividend income over time. A dividend income stream can be a great way to supplement your retirement income or even add a little extra money to the family till each month. If you simply purchase $3,000 in dividend-paying stock per year, and that stock has a dividend yield of 10 percent, after 10 years, you will have $30,000 in stock (minus or plus market fluctuations) and be receiving $3,000 a year in dividend payments. This illustrates how even a small investor can build up a significant dividend income stream for her retirement after 30 or 40 years.
Learn when the dividend payments will occur. Dividend payments may occur at any time, but usually occur yearly, bi-yearly or quarterly. Plan on when those payments will be coming in so that you can adjust your income strategies accordingly.
Tips & Warnings
- While you hold voting rights as a holder of common stock in a company, ultimately it is up to the board of directors to approve, increase, decrease or suspend dividend payments.
- Photo Credit stock image by Michael Shake from Fotolia.com
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