On Learning to Love Dividend Investing

by Miranda Marquit · 7 comments

One of the things I’ve wanted to do for a long time is start a dividend portfolio. I like the idea of building a dividend portfolio that can (eventually) provide me with a revenue stream and increase my income diversity.

However, one of the challenges to dividend investing is the fact that dividends build up slowly. You only receive a few cents per share, so it can be discouraging if you start out with a small amount of shares.

During the past year, though, I’ve been part of an investing challenge. Along with several other bloggers, I’m seeing what I can do with $1,000. I decided this was the perfect opportunity to get a start on my dividend investing portfolio — so my entire $1,000 went into dividend paying investments.

So far this year, my investments have resulted in $30.50 in dividends. While it’s not a ton, it’s still free money (that I used to buy more shares of dividend-paying investments). Now that I’ve got the ball rolling, I can see better potential — and I’m ready to take my investing up a notch.

Two Things to Know About Dividend Investing

Think in the Long Term

One of the reasons that people get discouraged with dividend investing is the fact that they usually have to start small. If you don’t have $100,000 to put in an account to buy a large number of shares, it’s hard to generate a decent income right away.

The first key to successful dividend investing is to view it as a long-term strategy. Start small, buying as many shares as you can, and then reinvest the dividends. Over time, you’ll have more shares, which means higher payouts and the ability to buy more shares. The cycle repeats itself.

You also need to be consistent when starting small. This means regularly investing when you can. Just as in other areas of investing, dollar cost averaging works for dividend investing — so continue to add to your portfolio. For my $1,000 challenge, I can’t add outside money, but as soon as the challenge is over, I’m going to make regular investments to help grow my dividend investment portfolio.

Reinvest Automatically

Because dividends are becoming so popular, many companies and brokerages are starting to add dividend reinvestment to the mix. Usually, companies that offer direct investing plans will allow you to have your dividends automatically reinvested without charging a transaction fee. Many brokerages have started doing this as well, allowing you to specify that dividends from dividend funds should be reinvested fee-free.

This can help you “set it and forget it” as you build your dividend investment portfolio for the long haul. Over time, the more you invest, and the more dividends you receive, the better success you’ll have. Then, when you’re ready to retire, you’ll have a bigger nest egg — and possibly another source of somewhat reliable income.

While it can be slow going to start, the fact of the matter is: over the long term, dividend investing can be a great way to build your portfolio and generate a little income.

Have you tried dividend investing? Any tips to share?

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  • Norris Stowe says:

    If one is investing for dividend reinvestment beware the tax man (IRS) if doing so in an after tax account or a drip account directly with the company. When you sell you will or your tax person will need to list all of those transactions when you sell the investment. I sold one last year which had monthly investments and dividends and the document went on for pages. Almost like the Govt does not want people to have capital gains.

  • Lance @ Healthy Wealthy Income says:

    I think there is a misconception about how much money you need to invest. You can start very low. With Vanguard you just need $3,000 for many accounts and after you get up to $10,000 you can switch to admiral shares to get a lower cost. The most important investment is the one you are doing and adding to on a regular basis. Just get started and you won’t regret it, you will just wish you started sooner.

    • David Ning says:

      So true about wanting to start sooner. Though I started pretty early, I often wish I took advantaged of more 401k space and contributed to the limit on the Roth accounts during my 20s!

  • ChrisCD says:

    Part of the problem when purchasing individual stocks is the commission you pay. I pay $8.95 to buy and sell stocks whether that is 10 shares or 100 shares. But, I don’t pay anything for the broker’s ETFs. So if I were starting out I think I would start with the ETF. As that grows through earnings and additional purchases you can eventually sell it if you want to buy into individual stocks or just keep going with the EFT. There are ETFs that focus just on dividend paying stocks.

    • David Ning says:

      Good point about commissions, as that can be a significant percentage of assets at the beginning. Aside from ETFs, you could always buy Vanguard mutual funds at Vanguard.com for free too.

  • I don’t really have any tips because we also just started investing in dividend stocks. So far this year our dividend stocks are performing really well (when counting the dividend) and we are very happy with the results. We decided to slowly continue to grow or portfolio with dividend paying and non dividend paying stocks. We don’t have that much money to invest, but we’ve realized you don’t need that much money to start. You just have to do it.

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