FOR THE PAST 20 YEARS, I’ve bought dividend-paying stocks and then reinvested my dividends. The big appeal: I increase my wealth with minimal effort.
Starting as a dividend investor used to be tricky, but it’s now much simpler. Many discount brokerage firms have no minimum to open an account and no longer charge stock commissions. You can also purchase shares through the dividend reinvestment plans offered by the transfer agents for many companies. These plans allow shareholders to reinvest their dividends and also purchase shares in amounts as little as $50 or $100.
Indeed, when I buy dividend stocks, I usually set them to “dividend reinvestment.” That means I don’t get my dividends in cash, but instead use them to buy additional shares. That way my share count—and the dividends I receive—increase automatically.
Of course, there are thousands of companies you could potentially invest in. Which should you choose? First, I avoid companies that don’t pay dividends. Second, for those that do, I look at their track record. Did they cut or eliminate dividends when the going got tough? How long have they been paying dividends? Do they have a history of increasing dividends over time?
In addition, I avoid companies that are in the news a lot. I prefer companies that are almost boring, that have been around a while—companies that are likely to have staying power. We’ve all seen how technology has replaced prior methods of doing things, and we know that’ll continue. It just isn’t easy to know what those changes will be. Financial history is full of once-successful companies that have since ceased to exist. How can investors protect yourself?
I know my choices won’t be perfect, which is why I buy shares in different companies in different industries. Some companies will fail or falter, even though at one time they were seen as very strong—companies such as Kodak, Sears and General Electric. But over the long term, my investments in those companies that thrive will more than make up for those that don’t.
Today, I own shares in stalwarts such as Johnson & Johnson, Colgate-Palmolive and Procter & Gamble, and some not-so-well-known names like RPM and Emerson Electric. No, I’m not recommending you buy these particular stocks—they’re just five of the 60 stocks I own. Among those 60, most I chose to buy, but a few of my holdings were the result of spinoffs or acquisitions by other companies.
Instead of buying individual stocks, you could purchase funds such as iShares Core High Dividend ETF (symbol: HDV) and Vanguard High Dividend Yield ETF (VYM). But I prefer individual stocks because I get to choose the companies myself.
Intrigued? To succeed at dividend investing, you need just three things. First, you need some initial capital. Second, you need to identify the companies you want to own and decide what to do with your dividends. Do you want income now or do you want to let the dividends buy more shares?
The third thing you need is time. Your income from a diversified collection of dividend-paying stocks should grow over time—and more time means more growth. The earlier you start, the more time you’ll have not just for your companies to raise their dividends, but for you to buy more shares by reinvesting dividends and by investing new savings.
That’s it. It isn’t magic. Getting started is the hardest step. But once you’ve gotten over that hurdle, things should just grow and grow.
Joe Springer is retired and lives in California. He likes oatmeal, gardening, taking a morning walk and laughing at his own jokes. Joe is the author of the blog Smile If You Dare, where he tackles money, retirement and other topics.