How To Start Dividend Investing For Beginners

I love watching investing videos on YouTube about dividend stock investing, and I put off doing it myself for almost two years.

However, I know one of the biggest investing mistakes is not taking action toward a goal so in early 2020, I started an account specifically for dividend investing.

Why Start Dividend Stock Investing?

Are you interested in investing in dividend stocks? Do you know why people choose dividend stocks? Why should you start investing in dividend stocks?

Let’s look at the basics of dividend stock investing!

What is a dividend stock?

If you are first being introduced to dividend stock investing you might wonder what exactly dividend stocks are.

Divide stocks distribute a portion of the company’s earnings to their investors on a regular basis. Most dividend stocks pay the investors quarterly but some do it on a different payout schedule like monthly.

When looking at dividend stocks you will see it has a dividend yield, which is the percentage of the stock’s current price that is paid out to shareholders.

If you hold shares of a stock with a dividend yield then you will be paid out based on that number. It is important to realize that stock dividend yield’s can change over time in response to the market and companies can also suspend or decrease dividends if they need to based on earnings.

When you receive a dividend payment it means the company things you will benefit more as a shareholder than they would by reinvesting that money. This is why newer companies tend to not have dividend payouts but older companies are more likely to pay dividends.

Why invest in dividend stocks?

Many people choose dividend stocks for their investing strategy when they want an investment that offers regular income.

Divide stocks distribute a portion of the company’s earnings to their investors on a regular basis. Most dividend stocks pay the investors quarterly but some do it on a different payout schedule like monthly.

Investing in dividend stocks mean you will be building up an income stream that is made up of those dividend payouts.

Dividend stocks are a great option for buy-and-hold type investors who plan to reinvest the dividend because your dividend payouts will be buying more of the stock for you.

Dividends are only one part of the stock’s total rate of return because these stocks also change in share price like every others stock. The stocks increase in return also provides growth to your overall portfolio.

What are the benefits of dividend stocks?

There are so many benefits of investing in dividend stocks.

The first of course, is that income stream from dividend payouts.

The next is that dividend stocks tend to be less volatile than growth stocks so they can help you diversify your overall strategy with a different type of risk.

Dividend stocks like the Dividend Aristocrats can be a reliable source of income over the years. (Read more about these stocks further on!)

Personally I chose building a dividend stock portfolio for the creation of an additional income stream that would continue to provide income in the future. I also wanted to diversify and play around with learning about specific companies since my main investments are all in index funds.

Where To Buy Dividend Stocks

So how do you invest in dividend stocks? How exactly do you buy this type of stock investment?

Choose An Investing Platform

You can invest in dividend stocks on any investing platform that allows you to open a brokerage account to buy individual stocks. Here are a few popular ones that allow you to buy stocks without any commissions.

You can open brokerage account to buy these stocks. A brokerage account is not a retirement account so keep that in mind.

You can also open a Roth IRA account and look into purchasing dividend stocks within your Roth IRA as well.

How To Pick Dividend Stocks

One area where I think many of us struggle when trying to invest is choosing what to invest in. How do you pick stocks? How do you evaluate dividend stocks?

Here are a few considerations when trying to choose dividend stocks for your portfolio:

  • Look at the company as a whole financially. Do they have a stable history? Do they have sound financials? Are they in massive amounts of debt or have plenty of cash?
  • What’s the history of the stock? Does the company have a long history of profit growth and dividend increases?
  • Is a dividend sustainable for the company? Evaluate if you think the company is paying out too much of its profits to dividends. Personally I like to see that the dividend stocks I buy don’t pay our more than 50% of earnings as dividends. Keeping earnings allows companies to grow.
  • What is the company’s growth potential? Some companies have limited growth opportunities so you want to consider if the company you are investing in has the ability to grow continually.

Remember that I’m not an investment advisor so this is just what has worked for me and my opinion.

If you aren’t sure of which stocks to buy you can always turn to investing experts of a list of stocks that are traditionally known as the Dividend Aristocrats. The Dividend Aristocrats are stocks that have increased their dividends for 25 consecutive years and it can be a great place to get started when you aren’t sure how to begin.

Here are some curerent examples of Dividend Aristocrats you’ve probably heard of who’ve had a long consecutive record of dividend growth:

  • Aflac (AFL)
  • AT&T (T)
  • Cardinal Health (CAH)
  • Clorox (CLX)
  • Coca-Cola (KO)
  • Colgate-Palmolive (CL)
  • ExxonMobil (XOM)
  • Johnson & Johnson (JNJ)
  • McDonald’s (MCD)
  • Medtronic (MDT)
  • PepsiCo (PEP)
  • Procter & Gamble (PG)
  • Sherwin-Williams (SHW)
  • Target (TGT)
  • Walmart (WMT)

This is just a small selection of the Dividend Aristocrats and you can find the others through a quick Google search to see which companies are on the current list. The list is updated once a year in January and occasionally some companies can be removed for other reasons.

The companies on this list have several qualifications and generally have to be large enough and have high share volume to meet demand for millions of investors. This leads companies on the list to generally be good picks because they usually remain stalwarts that are unlikely to be acquired by another company (and are usually the ones doing the acquiring).

These can be a great place to start as a beginner to choosing dividend stocks since they are companies with a proven track record of paying out dividends.

Investing in dividend stocks through ETFs

Another option for buying dividend stocks is to do it through an ETF. ETFs are exchange-traded funds which means they are investment funds traded on the stock exchange just like stocks.

ETFs can hold assets like stocks, bonds, or commodities and there are many different types including ones made up of dividend stocks. ETFs are bought and sold during the day while the stock exchange is open and this causes the price to fluctuate during the day.

One of the benefits here is that a dividend ETF usually includes dozens if not hundreds of dividend stocks which spreads out your risk over multiple companies. This generally protects your ability to get a dividend because even if some companies cut their dividend that will have a smaller effect on the fund’s dividend overall.

When choosing a dividend ETF you should again look to evaluate the fund you are buying:

  • Find dividend ETFs buy searching for them on your broker’s website (find a broker above in “where to buy dividend stocks”)
  • Analyze what the ETF is actually invested in and the details. Consider the actual investments, the dividend yield, the returns over the last 5-10 years, the expense ratio.

Just like buying a dividend stock you will want to evaluate the ETF in the same way.

Where I Do Dividend Investing

I decided to start my dividend investing on the Robinhood App platform.

My dividend investing portfolio is set up for the goal of achieving a dividend income for my daughter in 15 years or so.

It’s a long term play for me which is why I buy strong stocks that pay dividends and then reinvest the dividends into my portfolio.

How I’m Investing In Dividend Stocks

My plan for investing in dividend stocks in my “Penny Portfolio” is a little bit different than the normal way most people invest. I will be investing a small amount monthly, but I mostly plan to use this as another impulse spending tool. I plan to fund this account irregularly in a couple different ways.

  • First way I will invest in these dividend stocks, whenever I want to impulse buy something my daughter doesn’t need like cute clothes, I will instead invest in her account. She has enough clothes to last til she goes to kindergarten so I don’t need to buy them, I just want to. Instead I plan to buy a stock share with that money and continue to create an asset that will last for decades instead of a piece of clothing she will outgrow in a few months.
  • Second way I will invest in dividend stocks is whenever I sell something of hers that is currently not being used I will invest that amount of money. I have a pile of toys that need to be out of my house soon, so when I declutter I will contribute that amount earned into the Penny Portfolio.
  • The final way I will invest in dividend stocks in this portfolio, is to contribute $10 a month in our normal budget. As you guys know, I like having small amounts like this in our budget just as a reminder of our bigger goals. While it may not be a focus, those little amounts add up in the background as we are doing other things with the majority of our money. Plus, $10 isn’t much and doesn’t hurt out budget since we’ve cut so many regular expenses and focus on free fun activities!

Free Stocks I’ve Got On Robinhood

The great thing about growing an account on Robinhood for dividend stocks is that referring other users allows me to earn free stocks.

People who watch my videos and read my blog are helping build this portfolio of stocks by using my referral link to sign up for Robinhood.

If you sign up using my link, you will get 1 free stock and I will get 1 free stock as well. So if you use my link you will be contributing to the Penny Portfolio and we will all be building this up to provide an amazing future to the cutest kid I know.

I’ve been very blessed to get a number of free stocks on Robinhood this year. I made a video sharing some of the free stocks I received on Robinhood during that week:

I like to share what free stocks I’m getting from Robinhood for a few reasons:

  • to show you what free stocks Robinhood is giving out these days
  • to show you what free stocks you might get for signing up with Robinhood
  • to be transparent about the fact that I am receiving stocks from referral signups (thanks guys!)

Every single week since I’ve started I have received a few free stocks and I’m thrilled people are getting interested in investing!

Since this portfolio is 100% focused on dividend investing I’ve sold any stocks that did not pay out dividends and used that money to buy more dividend stocks of our choosing.

Why Dividend Stock Investing?

I wanted to share this little dividend stock portfolio project I started in order to let you know why there was a $10 Robinhood line item in our budget for those who were curious.

February 2020 was the first month for this account and several months later in June 2020 I hit $1,000 invested in my dividend portfolio.

Now that we have $1,000 in the dividend portfolio in Robinhood we will now work toward hitting $5,000 invested. The ultimate goal will be much higher than this in order to create a steady stream of income from the dividends.

The companies we are investing in through this portfolio are all companies that we love, trust, and actually use in some way. We’ve chosen to invest in companies that we actually use on a regular basis. This includes:

  • Disney
  • Microsoft
  • Apple
  • Starbucks

And others! We’ve also bought some shares of a Vanguard ETF that more broadly covers the markets and helps diversify our account overall.

I’m excited to continue increasing this account and growing it so that we can eventually use the dividends as an income stream!

This is the perfect time for a reminder that I am not an expert at all and this is just me sharing my personal experience. This is not financial advice, this is just entertainment and me sharing my experience. My stock picks are personal and never a suggestion that you should pick the same. Do your own research!

Mary is the founder of Pennies Not Perfection where she shares her journey to build wealth through online income. She quit her day job in 2021 after she paid off her debt and doubled her 9-5 salary.

Mary's favorite free financial tool is Personal Capital. She uses their free tools to track net worth and work toward to financial freedom.

Her favorite investment platform is M1 Finance, where she built a custom portfolio for free with no fees. She shares her portfolio growth and savings progress every month on YouTube.