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Are you leery about dipping your toe in the stock market, and don’t want to do anything too risky? High-dividend stocks are low-risk and a smart investment if you are looking for steady income. A dividend stock is a consistently profitable company that regularly shares profits with shareholders through dividends. To collect dividends, you would own shares in the company through a brokerage account or retirement plan. They are a sound investment because the dividends provide regular income while the capital in the stock appreciates.
It’s all about dividend growth, and if you’re looking for more of a low-risk investment, and are nearing retirement age, then dividend stocks are the way to go. Although, there is still a risk with these particular stocks, especially if you don’t know which ones to avoid.
Here are three ways to invest in dividends:
Individual companies
Buying stock in a company that pays out dividends is one way to start receiving them. Many reputable companies have a good history for increasing payouts yearly. But, make sure you do the research. You’ll want to make sure the company you invest in has a good duration of payouts under their belt. One way is to figure out the company’s dividend yield, which can be calculated by dividing the annual per-share dividend by the stock price. You can use the percentage to compare across the different companies and decipher where to get the biggest bang for your buck.
High-yield mutual funds and ETFs
With dividends in mutual funds, your money is more diversified, with funds and ETFs (exchange traded funds) producing high-yield dividends. This is a great way to generate a higher payout than a regular portfolio. Home Depot and JP Morgan Chase are examples of high-yield dividends.
Dividend-appreciation funds and ETFs
These are companies which have a consistent history of increasing dividend payments. This is more for the long-haul investor, with the yield being lower than funds with higher payouts, but the dividends continue to grow and appreciate over a longer period of time, based on a company’s earnings and growth rates. Examples of companies with dividend-appreciation funds are Apple, Microsoft, and Walmart.
What to look out for:
Taxes
Because dividends provide a source of income, they can be taxed as such, especially true if the shares are in taxable brokerage accounts. Try owning the shares instead through a traditional or Roth IRA.
Rising interest rates
Especially in the case of high-yield dividends when interest rates go up, there is a risk. When interest rates rise, investors start taking out their high-yield stocks, and move towards bonds or other assets that are more low-risk, which in turn causes stock prices to fall.
Dividends can be cut
When a company pays out a very high dividend, be mindful that the high-yield might look favorable and the investors might have done that because they expected the company to cut the payout. Financial difficulties can cause companies to cut dividends, so that’s why it’s best to do your research and to not just act fast when the payout looks attractive.
Long-term, dividends can hugely impact your portfolio and will help generate income which you can also reinvest and use for retirement.