In my opinion, dividend-paying stocks are the best investment choice out there when it comes to growing your money, even if you only have a small amount of money to invest. All other types of investments, such as real estate and growth stocks, aren’t necessarily bad choices but there is a reason I like investing in quality companies that pay a healthy dividend: I don’t have to take on debt to do it (like real estate, for example) and I don’t have to worry about the ups and downs of the stock market as much as I would for growth stocks.
THE DEFINITION OF A DIVIDEND (SIMPLIFIED)
Dividends are money that is payed out to you on an annual, semi-annual quarterly or even monthly basis just for owning the stock. The amount paid to you depends on how many shares you own, meaning the more shares you own, the more money they give you. You don’t have to do anything else to get this money—just hang on the shares. What’s great is that there are stable companies that pay dividends—companies like Verizon, AT & T, Pfizer, Merck, Glaxo-Smith Kline and more. You don’t have to invest in risky companies to get a good return.
THE IMPORTANCE OF FORWARD DIVIDEND YIELD
When I’m choosing which company to invest in, I look at their forward dividend yield. This is the projected percentage I’ll earn based on the declared dividend amount and price per share of that company. I typically look for solid companies that have been around for years (preferably 10 years or more) and that pay at least 3.3% and no more than 7% for the forward dividend yield. The reason why I choose a dividend of at least 3.3% is because this will typically outpace inflation. Inflation rates have been an average of 3.27% between 1914 and 2018 and if an investment doesn’t outpace inflation, than you are actually losing money. That’s why sticking a large chunk of your money into a savings account that earns you 2% (if you’re lucky) is a terrible idea. At the end of each year, you’re likely to be in the hole with your money because inflation has outpaced the rate of return of your savings account.
I also look for companies that pay less than 7%. I have learned through my research—and through real-world experience—that companies that pay more than 7% are often unstable. They may be less than 10 years old and still trying to get their footing in their industry or they are in financial trouble and desperate to attract new investors. Any sign of instability is a red flag for me because the chances are greater that I will lose money instead of gain.
FINDING THE FORWARD DIVIDEND YIELD
You can find a company’s forward dividend yield by simply typing in a search with the company’s name plus the phrase “forward dividend yield.” For example, I typed in “Verizon forward dividend yield” and was given the answer right away. You can also go to either your brokerage company’s website or visiting a site like Yahoo Finance. You’ll type in the company’s name or ticker symbol and pull up either that company’s summary or it’s statistics. Look for the the forward dividend yield expressed as a percentage. I always start here when deciding whether or not to buy a stock.
COMPOUND INTEREST EXPLODES YOUR EARNINGS
If you’re a small investor, you may feel like there’s no point in buying dividend-paying stocks. After all, if you only have a $1000, you would only earn $40 for the year for a 4% forward dividend yield. But what you may be forgetting is compound interest, which is money earned on top of the extra money earned. Using our $1000 and 4% yield example, here is how much you would end up with per year over a ten year period:
As you can see, our $1,000 turned into almost $1,500 after 10 years. If we had parked that same 1K in a savings account earning a generous 2%, we would have roughly $1,200 after 10 years. Multiply all of this on a grander scale, such as 200K of extra lifetime earnings, and the gap turns into a chasm: roughly $244,000 total after 10 years of sitting in a savings account earning 2% versus $296,000, for a difference of 52K.
Now, let’s take this a step further. What if this 200K was stretched out over 20 years? That $200,000 would turn into 297K after 20 years at the 2% rate and a whopping 438K after 20 years at 4%. That’s a difference of $141,000. Do you want to forfeit that 141K? I know I don’t!
YOU CAN STILL MAKE MONEY ON GROWTH
Just because you’re looking at earning a dividend on the stock, doesn’t mean you can’t also earn money simply by the stock price going up per share (called capital gains). Besides getting a consistent return for my money in the way of dividend payments, I also have made a lot of money through the share price escalating for these companies.
For example, I bought Verizon years ago for $40.73 per share. As of today it is trading at $53.95, meaning I have currently up 32.46% on just share price alone. This is on top of what I have earned over the years through their quarterly dividend payments. Of course, the price per share could decline but since I will be hanging onto the shares for the foreseeable future, and because Verizon is a large and stable company that has been around for more than 10 years, I expect that when the day comes that I do sell, I will still be up a hefty profit.
Dividends can also help offset any losses. Even when I’m down a bit on the stock price, I know I’m still making money off of a stock that pays a dividend. So there is a big upside when the stock price also goes up but there can still be an upside even when the price per share goes down.
In the article “Cash Dividends and Dividend Payment,” Investopedia explains it like this: “Herein lies the appeal to buying stocks with dividends: they help cushion declines in actual stock prices, and they also present an opportunity for stock price appreciation coupled with the steady stream of income that dividends provide.”
MY EASY SYSTEM FOR PICKING STOCKS
I started my dividend investing with just 1K. After learning what I could through books and articles, I wanted to create a system that I could use over and over again to successfully pick stocks. When it’s time for me to buy more stocks, this is what I do:
- I start with looking at lists of dividend-paying stocks I find on websites like dividend.com and suredividend.com.
- I look through the list and make a note of the companies I have heard of and that had dividend yields between 3.3 and 7%.
- Then I check the current stock price I compare it against the stock prices over the last 1, 3, 5 and 10 years for each company. I look for a stock that is undervalued at the moment—meaning it’s share price is down for where it should be for the year. But it needs to be moving in an upward trajectory overall. In other words, has the share price been generally moving up over the past 3, 5 and 10 years? (Sites like Yahoo Finance have charts for these time periods that you can adjust accordingly.)
- If everything looks good so far, the last step is to go over the latest news for that company. I use sites like Yahoo Finance for this but sometimes I will just search the company’s ticker symbol followed by the phrase “news” (such as “MO news” for Altria Group or “VZ news” for Verizon).
- Finally, I glance over what the overall sentiment is by the so-called experts. Sites like Yahoo Finance aggregate what Wall Street analysts recommend—whether they think a particular stock is worth buying at the current price. While the experts can certainly be wrong (which is why I use the term somewhat lightly), I do take this into consideration. On the Yahoo Finance website, you can find this info on the right hand side, about half-way down the page. They call it “Recommendation Trends” and “Recommendation Rating.”
If all of this looks good, I take it as a green light and buy the stock. I must note, however, that I never take large positions on any one stock—meaning I don’t invest a huge percentage of my money into one company. I’m sure you’ve heard it by now but it’s always good to diversify.
There are lots of quality dividend stocks to choose from–too many to list here. But I did compile a list of some of my favorites. I also have other companies not listed here that I favor for their stability and solid dividend yield. (Please note that I am not telling you to go out and buy these stocks. The choice is up to you. I am just sharing some of the stocks that I have bought within the past 5 years.) Here is a list of some of these companies, along with their current dividend yield:
You can start buying quality, dividend-paying stocks with a small investment. Some brokerage firms require a minimum investment of $1,000 or more ; the Robin Hood app has no minimum investment and you can trade your stocks for free. With companies like AT & T currently trading at $29.55 per share, only a small investment is needed to purchase some stock.
I started years ago with just $2,500 with a company 401(k). Years later, I opened a separate non-retirement account with just $1,000 so that I could put as much as I wanted in and access it when needed.
If you have a 401(k) or 403(b) through your work, then you are probably already investing in the stock market with your shares being purchased through a brokerage account. You probably only have the option to choose from a selected group of mutual funds. If you want to focus on dividend-paying stocks but also want to capture gains through stock price appreciation, then you could consider a growth and income fund, if it is one of these options. These funds try to capitalize on increases in share prices but also include stocks that pay dividends. If I were to invest in a mutual fund right now, this is the type I would choose. Just be sure to check its Morningstar Rating, which measures a fund’s risk-adjusted return relative to similar funds. They rate funds from 1 to 5 stars. Only invest in funds with a 5-star rating.
DIVIDEND STOCKS BRING MORE MONEY AND PEACE OF MIND
It amazes me how many people shy away from the stock market. Everyone wants more money but if you don’t learn how to invest, you’re reducing your chances of getting wealthy and leaving money on the table. But I also understand how it can be overwhelming.
No one taught me how to invest growing up. No one in my family invested in the stock market and I certainly didn’t learn it at school. I read articles and books like Paul Rubillo’s Be a Dividend Millionaire. I’ve also watched countless YouTube videos. I’ve made a few mistakes over the years but have since learned a formula that has made it easier for me to pick stocks. You can do the same. You just have to educate yourself, like I did.
The other thing I like about investing in stocks that pay dividends is that I can “set it and forget it.” I don’t have to check my stocks every day, every week or even every month. Because these type of stocks tend to be stable ones, I can trust that the company isn’t going to go out of business and that, in the long run, should make me money. This saves me time, energy, stress and worry–which aligns with my philosophy that making money doesn’t have to be stressful. It’s in this way that these stocks pay more than just monetary dividends. Peace of mind, as the old MasterCard commercials would say, is priceless:)