If you’re a regular reader of Sprout Wealth then you know we like to talk about different ways to make money. Some of those are uncommon ways while others are more common. Investing in the stock market, in my opinion at least, is one of the more common ways to make money and grow your wealth.
With that in mind, one of my favorite ways to make money in the stock market is through dividend paying stocks. Dividend paying stocks, while not always foolproof, are one of the best ways to make money in the market as they’re as close to passive income as you can get…from the stock market that is.
Although the market or the dividend stock itself may go up or down you still get the dividend (I’ll discuss more on this later) which is money in your pocket. That’s not too bad in my opinion. Seeing as Warren Buffett is a huge fan in dividend paying stocks, I think I’m in pretty good company. 😉
Dividend Paying Stocks Bring a Known Return
If you’re not certain what a dividend paying stock is, it’s essentially done by the given company as a way to return wealth to its shareholders. These are typically not growth related companies (think technology companies and newer companies) but rather more mature companies.
Depending on the company, most dividend paying stocks will pay shareholders a certain amount of money per share on a quarterly basis. Others will do it on a monthly or semi-annual basis, but most are quarterly. These payments can either be received in cash or reinvested to buy additional shares of the stock.
Personally speaking, I like to reinvest into additional stock as I’d rather have it work in the stock market for me, but either works just fine. Simply put, I love dividend paying stocks as they bring in passive income that I do nothing to gain. Other than free money through a 401k match, there’s not much better I can think of.
Getting paid a dividend is great, but some dividend paying stocks are better than others. When I’m investing in dividend paying stocks, I tend to focus on Dividend Aristocrats. These are dividend stocks that have increased their dividend payout every year for the past 25 years. You can find a list of the Dividend Aristocrats here and it’s an understandably short list. That said, I love to look at solid dividend paying stocks as a way to bring in some known return when investing in the stock market.
One Warning on Dividend Paying Stocks
It may seem as I’m all sunshine and lollipops on dividend stocks. While I do think they can be a great addition to a portfolio, they’re not without issues. First and most important, they can change.
Do you remember what happened with BP a few years back? They had been a solid dividend paying stock that many retirees had as a part of their portfolio. Well, they canceled their dividend to help pay for the cleanup of the Gulf. The same thing happened with GE during the recession. They slashed their dividend by 2/3 as a way to not pay out too much. The point being is that they’re not guaranteed and if counted on for income it hurts to be impacted.
There is also the belief that dividend paying stocks perform better when the stock market is down, though I’ve seen no evidence to support that. The other issue that many overlook is that when you receive a dividend it is considered taxable. I spoke to upset investors on a daily basis who had no idea that dividends were taxable. The amount may vary by individual, but they are taxable. The way I get around this is by only investing in dividend paying stocks in retirement accounts, so you will want to keep that in mind.
Diversity is Key
Now that we’ve sort of taken a pro/con look at dividend paying stocks, it’s worth pointing out that diversity is key when it comes to investing. I believe solid dividend paying stocks can be a great addition to low-cost index funds in order to be more fully diversified. That’s also not to mention the fact that they can be a great way to gain income through investing. Of course, you need to be mindful of how your portfolio is performing, but slow and steady wins the race when it comes to investing so you need to keep that long-term view as opposed to being unwieldy.
If you’re looking to invest in dividend paying stocks, there are various ways you can accomplish that. There are numerous index/mutual funds that specialize in them; you can invest in the individual stock itself; or, you can create your own fund through places like Motif Investing that allow you to create your own dividend portfolio. I personally like to go the cheapest and easiest way to accomplish a goal, though that’ll look different for everyone based on your specific situation.
Do you invest in dividend paying stocks as a way to bring in more income? What are some other ways you look to make income from the stock market?
Photo courtesy of: Lending Memo