When you’ve reached the point of wanting to expand your financial portfolio beyond your checkings and savings accounts, investing in stocks is one of the most well-traveled avenues to consider. But getting into the stock market is no small task. The New York Stock Exchange has been in business for 225 years and it averages around $170 billion in trades each and every day. One of the most well-rounded investment you can use to build your portfolio is dividend stocks. Investing in stocks in general involves taking a measure of risk, but the characteristics of dividend stocks help mitigate that for involved investors.
Dividend Stocks vs. Non-Dividend Stocks
When you invest in a company’s stock, you receive shares of ownership of that company. The more you have, the larger your percentage of ownership in the company. Dividend stocks are those that give payments to stockholders, either in cash or in additional shares, based on the number of shares each stockholder owns. Most US dividend stocks pay dividends four times a year – at the end of every financial quarter. Others make those payments once or twice a year, while others occur monthly. Companies that choose not to give out dividends usually do so because they have other uses for the money involved. Non-dividend stocks are usually companies in their growth stages that are reinvesting their profits into improving the company.
Which Companies Offer Dividend Stocks?
A list of every company currently offering dividend stocks would be a bit overwhelming. But there are plenty of resources across the Internet that can guide you in picking worthwhile selections based on any number of parameters. These parameters can include typical short- or long-term gain,specific industry, or dividend calendars. In general, companies that are well-established and achieve consistent, moderate growth are the most likely to offer dividend stocks. Their purpose in doing so is to keep their shareholders pleased and buying more stock. Any company that you think of as an established brand likely is a dividend stock. Industries that usually offer consistently high dividends include:
- Healthcare
- Pharmaceuticals
- Banks
- Oil & gas companies
- Utilities
- Manufacturing
- Metals & Mining
- Industrial
- Transportation
Types of Dividends
Just like stocks themselves, all dividends are not created equal. There are three forms that most dividends take, which are explained below.
- Cash dividends are those that are given to stockholders in the form of a check or electronic payment. Based on the profits the company has made that quarter and the number of stockholders in the company, its board of directors will affix a price per share for the dividend payment. For example, if you owned 500 shares of Exxon and the board of directors put a a price of $0.50 per share as the dividend, you would receive a payment of $250 simply for owning 500 shares. Most companies will give you the option to reinvest your dividend automatically. If Exxon is trading for $80/share at the time of the dividend, your $250 would buy you an additional 3.125 shares.
- Stock dividends are sometimes offered when companies don’t have a lot of operating cash, but they still want to keep shareholders invested. Instead of a dollar amount, dividends are given in percentages. To repeat the example from above, if you owned 500 shares of Exxon and the board of directors went with a dividend rate of 2%, you would receive an extra 10 shares of stock on the day of the dividend. If Exxon is trading for $80/share at the time of the dividend, your stock value ‘s would jump by $800.
- In addition to their quarterly stock or cash dividends, some companies pay out special one-time dividends. These can occur when t the company sells another business or liquidates an investment. Rather than reinvest the profit, the company makes it into a dividend. Another special dividend is a stock split, where a company will lower the price of the stock by increasing the overall number of shares in existence. For instance, if you own 500 shares of Exxon at $80/share, a split could drop the price to $40/share but increase your quantity to 1,000 shares. This is often done when companies feel their stock price is too high and creating a barrier to more people investing in it.
How to Buy Dividend Stocks
If you’ve never bought stocks before, or even if you’ve bought a few but are looking to branch into dividend stocks, there’s one rule to always follow: Do your homework. With so much history behind it, the stock market is a world unto itself, with its own rules and terminology. Your first task will be to select a broker to open an account with. The broker’s job is to conduct your stock market transactions for you and hold your money in an account. You have total visibility of this account just like you would a normal bank account. You’ll need to compare brokers to discover which fits your needs best. Most take flat-rate commissions per trade and many have minimum balances that you must keep in your account at all times. Once your broker is selected, you’re off to the process of selecting which dividend stock to buy. There’s no wrong way to pick a stock. Some investors do it by simple word-of-mouth recommendations or based on a news story they read, hea or watch. Others pick companies whose products they use and enjoy. If you want more information on a particular dividend stock, you can access the company’s annual report or research the stock on a broker’s website. Your next task is to decide how many shares of the dividend stock you want to buy. This number should be based on your own financial goals, not any outside influence. Once you’ve got a number in mind, you must choose between two order types for dividend stocks: market orders or limit orders.
- Market orders are straightforward. You buy the shares at the current market price. However, prices change almost continuously, so the price you actually buy the dividend stock at tends to be slightly different than what you ordered it at.
- Limit orders are more rigid. They indicate that you’re only willing to buy a dividend stock when its share price reaches a certain dollar level. For instance, say a stock is listed for $50/share, but you feel its value is $45/share. You would set your limit order at $45/share and no shares would be bought until that price was reached. Realize however that limit orders are secondary to market orders in terms of being filled. Market orders are done first, followed by limit orders on a first-come, first-served basis.
Conclusion
Companies offering dividend stocks are generally considered safe investments since they are well-established. If you are just getting your feet wet in the stock market or looking to expand your financial portfolio, investing in dividend stocks is a solid next step.
