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If you’re trying to grow your money, you’ve probably heard that investing in the stock market is one of the greatest wealth-building activities of all time.
Investing in publicly traded companies can give you access to a firm’s earnings and help you stay ahead of inflation. Those are attractive benefits, though the risk of losing all your money and walking away without a dime can cause you a bit of angst.
That’s why having the right strategy that aligns with your goals, time horizon, and risk tolerance is key. One of the most overlooked ways to beef up your stock portfolio and enjoy some passive income is through dividend investing. Although it’s a strategy typically reserved for retirees, everyone can benefit from sprinkling some dividend stocks into their portfolio.
Here are a few ways you can build your wealth waterfall by taking the plunge into dividend stocks.
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The 411 on dividend investing
Companies have been loading investors up with dividend income for decades, providing a relatively safe and reliable way to earn a stream of passive income in the stock market. You can think of dividends as a reward you earn for investing in a company and holding shares of the stock for a period of time.
The process to earn dividend stocks is pretty straightforward after you determine what you want and become familiar with the process. There are hundreds of dividend stocks to choose from, but it’s best to consider adding high-quality dividend stocks to your list that have a reputation for consistently paying dividends over time.
Once you’ve compiled your watchlist of dividend stocks and have performed your due diligence, then it’s time to go shopping. You’ll be able to calculate how much dividend income you can potentially earn every year based on the number of shares you’ve purchased.
Let’s say you buy 1,000 shares of a company that pays a $5 annual dividend. You would receive $5,000 in dividend payments over the course of the year. If you bought shares for $100 each, that leaves you with a 5% dividend yield — not too shabby. You just have to make sure the company has sufficient cash to continue to pay those dividends.
Those sweet dividend deposits can be used any way that you please. Here are a few options:
Accumulate more shares of a stock by setting up a DRIP
Use the money to fund your lifestyle
Save the cash for a future opportunity
Acquire stock in another company
Earn an automatic pay raise
There are few experiences in life where you can gain access to an automatic pay raise without lifting a finger. Investing in companies that commit to increasing their annual dividend payout is one way to tap into those perks.
For example, home improvement retailer Lowe’s (NYSE: LOW) has given shareholders a cash dividend every quarter since going public. The company is recognized as a Dividend King — an elite listing of company stocks that have boosted dividends for at least 50 consecutive years. Lowe’s is also, of course, on the list of Dividend Aristocrats, which includes companies that have increased their dividend for at least 25 consecutive years.
A dividend growth strategy works wonders for anyone who wants to gain access to more income in the stock market every year. Essentially, you’re paying a price today for an income stream that can continue growing in the future. However, you should be aware that no dividend is guaranteed, and you’re not entitled to dividend income unless a company’s board of directors declares a dividend for a certain period.
Enjoy an extra stream of income for life
Once you get the ball rolling on your dividend investing system, you can sit back and watch the money flow into your account. While most companies will pay dividends on a quarterly schedule, there are some companies that will pour dividend income into your account every month.
When you first dive in, your dividend income may seem insignificant if you’re starting with a small investment. Don’t get discouraged. As long as you keep going and contributing to your dividend portfolio, you’ll increase your income potential. Soon, you’ll witness the power of compounding kick in — as long as you reinvest your dividends — and your dividends will produce more dividend income over time.
Dividend investing is a surefire way to earn money in the stock market. By starting now, you can set yourself up to have a lifetime of riches even if you don’t add another penny to your investment portfolio later. As long as you don’t dump your stocks, all dividends declared will keep coming your way.
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Charlene Rhinehart, CPA has no position in any of the stocks mentioned. The Motley Fool recommends Lowes. The Motley Fool has a disclosure policy.
