When it comes to investing, many of us have developed our own criteria. We like to feel as though we are choosing investments that help us reach our goals.
One way to boost your portfolio and reach your goals a little faster is investing in dividend stocks.
What better way to add a little oompf to your portfolio than getting a share of a company’s profits on top of seeing the capital appreciation?
What are dividends?
Dividends are extra payments companies make to shareholders. This is money you receive by being a stockholder in a company. It comes on top of any capital appreciation the stock experiences. With dividends, you are rewarded for maintaining your take in the company.
Dividends can be paid out monthly, quarterly, semi-annually, or annually. In some cases, companies just pay special dividends on occasion, rather than paying a regular dividend.
Your payout is based on the number of shares you own. If you own 500 shares of KO, and the dividend payout is $0.37, you end up with a payment of $185. That’s not too bad, especially considering KO usually pays a dividend four times a year. That’s more than $700 extra in your pocket for the year.
Investing in dividend stocks
When you invest in dividend stocks you have the chance to reap extra rewards. Getting started is pretty easy. All you need to do is open a brokerage account and start investing in stocks that pay dividends.
One way to boost your ability to make more over time when investing in dividend stocks is to reinvest those dividends. It might be tempting to take the dividend payout and spend it, but the reality is that you can help build your portfolio by reinvesting.
Before you open a brokerage account, find out if it offers free dividend reinvestment. Some brokers will lets you set up a plan to reinvest your dividends without paying an extra transaction fee. Another option is to check with the company for its own dividend reinvestment plan. Some companies have plans specifically designed to help you reinvest.
Reinvesting is a good idea, especially during the building phase of your portfolio. When you first start investing, chances are you don’t have a lot of money. So, you might only start with 10 or 20 shares of something. You’ll add more shares each month with dollar-cost averaging, but it can take time to build that portfolio.
If you want to give it a little extra help, dividend reinvestment can do that. You dividends are reinvested, buying extra shares of the stock so next time your payout is a little bit bigger — and you can buy even more shares.
Taxes and dividend stocks
One thing you do have to remember when investing in dividend stocks is the taxes. Dividends are considered income, so you do have to pay taxes on them. The good news is that they are taxed at a favorable rate — at least for now.
In 2017, the highest rate you will pay on dividend income is 20%. However, if you are in a lower tax bracket, you might not pay any tax on dividends. What you pay depends on your tax bracket. If you owe, you need to pay that amount, even if you reinvest.
Your dividend reinvestment can also be used when figuring your taxable gain when you sell at a profit. Say you invest $1,000 in a fund. You end up with $200 in dividends, which you reinvest. Eventually, you sell for $2,000. Now, you might think you owe taxes on the full $1,000 gain because you original bought for $1,000 and sold for $2,000. However, because you reinvested dividends, you can subtract that $200. Instead, you are taxed on $800.
How to find dividend stocks
When I first started investing in dividend stocks, I began with funds and with the dividend aristocrat list.
Funds that pay dividends can provide you with instant diversity, and you don’t have to worry about stock picking. I like indexing for that reason. It works with dividend investing as well.
Dividend aristocrats are also a good place to start. These are companies that have increased their dividend each year for 25 consecutive years. There are companies on that list that have been increasing dividends for more than 40 years. With dividend aristocrats, you don’t get anything sexy, but you do end up with steady companies that show they can keep boosting the payout.
Stock screeners can also help you find dividend stocks.
In the end, investing in dividend stocks offers a great opportunity for you to boost your portfolio and, eventually, your income.