How to buy Dividend stocks? A beginner's guide

Guide to purchasing dividend stocks: Learn how to invest in companies that pay dividends.

May 13, 2024 - 16:14
May 13, 2024 - 16:15
How to buy Dividend stocks? A beginner's guide
Dividend stocks

Investing in dividend stocks or funds can provide a steady stream of passive income and contribute to long-term portfolio growth. This guide explores how to incorporate dividend-paying stocks into your investment strategy, along with the associated benefits and risks.

How to buy Dividend stocks?

Acquiring a dividend-paying stock follows the same process as purchasing any other stock. Investors establish an account with a brokerage, conduct research on the desired dividend-paying stock or fund, and proceed to buy it through the broker's order entry system.

Steps to purchase Dividend stocks

Purchasing dividend stocks is a relatively straightforward process. Investors open and fund an account, conduct research on the stocks or funds they're interested in, make the purchase, and then keep an eye on their investments.

Here's how it works:

Step 1: Open a brokerage account. This can typically be done online and doesn't require immediate funding.

Step 2: Fund your account using various methods like ACH bank transfer, wire transfer, or check.

Step 3: Choose your stocks. Use stock screeners provided by most online brokers to filter for dividend-paying stocks based on dividend yield and other criteria. Consider factors like industry, market capitalization, and risk.

Step 4: Monitor your stocks. Keep track of the overall performance of your stocks, including dividend payments and any changes in company fundamentals. Pay attention to factors like dividend sustainability and company earnings.

Step 5: Receive your dividends. Dividends are typically distributed quarterly. There are four key dates related to dividend payments: the declaration date, the ex-dividend date, the record date, and the payable date. The declaration date announces the dividend amount and the ex-dividend and payable dates. The ex-dividend date is when trading begins without the dividend being paid to stockholders. The record date is the day following the ex-dividend date, determining who receives the dividend. Lastly, the payable date is when the dividend payment is distributed to stockholders.

What is required to open a Dividend stock account?

Personal details

Just like with any other brokerage account, opening a dividend stock account necessitates providing specific personal details. These include your name, Social Security number (or taxpayer ID number), address, email address, date of birth, and a government-issued ID (like a driver's license or passport).

Financial details

Brokers will also ask for personal financial details, such as net worth and income, as part of the Know Your Client (KYC) regulations to assess whether opening a trading account is suitable for you.

Opening a trading account for the purpose of wealth accumulation and generating income are conservative rationales for account opening and are generally sanctioned if the provided personal information meets the required criteria.

Types of Dividend investments

Investment choices for dividends encompass individual stocks, high-yield mutual funds, and ETFs, along with dividend-appreciation funds and ETFs. While all these options involve acquiring dividend-paying stocks, mutual funds and ETFs function as investment vehicles that pool multiple dividend stocks on behalf of investors.

Individual companies

Purchasing shares of individual companies that offer dividends provides the most straightforward route to access dividend-paying stocks within a portfolio. In this approach, investors curate a diversified portfolio of dividend-paying companies through their own research and decision-making process. Typically, this method doesn't entail additional costs, particularly since many online brokers offer commission-free stock trading. However, investors bear the responsibility for all investment decisions, necessitating thorough research and ongoing monitoring of their positions.

High-yield mutual funds and ETFs

High-yield mutual funds and ETFs are professionally managed funds that select dividend-paying stocks with high yields on behalf of investors. These funds allow investors to receive dividend payments either in cash or by reinvesting them in additional shares of the mutual fund or ETF. While most of these funds distribute dividends quarterly, some may do so monthly. However, investors should be aware of the fees associated with these funds, as they can impact overall performance. Therefore, investors need to assess whether the fees justify the convenience of not having to select and manage individual dividend stocks themselves.

Dividend-appreciation funds and ETFs

Similar to high-yield mutual funds and ETFs, dividend-appreciation funds and ETFs are managed by professionals who select dividend-paying stocks for their portfolios. However, the focus of these funds is on dividend stocks that have consistently increased their dividend payouts over several quarters. As with high-yield funds, investors should consider the fees associated with these funds when making investment decisions.

Key considerations when establishing a Dividend stock account

  • Fee structure: Fees play a pivotal role in investment accounts, impacting overall returns. Luckily, many brokers offer commission-free trading for individual dividend stocks. While commission accounts may have low fees, opting for a no-commission broker is common among dividend investors.
  • Account minimums: Most online brokers have done away with account minimums. However, some mutual fund companies may have minimum investment requirements. Thankfully, many dividend mutual funds and ETFs are accessible through commission-free online brokers.
  • Research and trading tools: Access to robust research tools is essential for selecting dividend stocks. Brokers with comprehensive stock screeners and fundamental/technical analysis resources are advantageous. While advanced trading tools are useful, they're less critical for dividend investing, which tends to be more passive.
  • Customer service: Responsive customer service is valuable, especially for novice investors. Brokers offering live chat support and quick response times can assist investors in using tools, making decisions, and executing trades effectively.
  • Security: Account security, including features like two-factor authentication, is vital for safeguarding trading accounts. Additionally, some brokers offer excess coverage beyond SIPC protection, providing added security for investors with larger accounts.

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