Tuesday, September 13, 2011

Getting Started in Dividend Investing

Getting started in dividend investing is fairly simple these days. With a few clicks of your mouse and some cash you can be up and running in no time.  The following is what you'll need to begin:

  1. A way to purchase stock
  2. A dedication to periodic investment
  3. Research tools to choose our stocks
  4. Time (yeah, that one again)

Purchasing Stock:
For those of you just beginning you may not even have an online broker, or you have some stock in an account that you'd like to transfer to an online broker.  There are specific features we need to look for before choosing a broker for dividend investing.
  • Does the broker allow stock dividend reinvestment? (some only offer it for Exchange Traded Funds or ETFs) 
  • Is the dividend reinvestment free?
  • If the broker allows dividend reinvestment, does it also allow for fractional dividend reinvestment?
There are some popular online brokers that do not offer dividend reinvestment as an option, or will charge you for the service.  Also, we want to be able to own fractional shares of a company when reinvesting dividends.  If you are reinvesting a $40 div, and the current price of the stock is $25, we want our broker to be able to buy 1.6 shares.  Be sure to do your due diligence when picking a broker.

Here are a couple brokers that perform the above.  
  • ShareBuilder.com - I am partial to Sharebuilder (ING Direct Investing) since this is who I use. There is no minimum to start and they offer easy ways to automate monthly stock purchases or contributions to your account.  This is a great broker if you are just getting started in dividend investing.  Frequent traders won't like Sharebuilder, but frequent trading is not an issue in dividend investing.
  •  E*TRADE FINANCIALMost people are probably familiar with ETrade, if not just for their commercials with the "Etrade Baby".  This is another discount broker that, last I checked, offered free dividend reinvestment and fractional purchases.  ETrade markets more to the frequent traders with their tools and research software.  It's overkill for what we need, but it's there if you want it.
DRIP Plans - DRIP Plans are company sponsored dividend reinvestment programs. The pros behind these are that they are usually cost effective (no fees to buy stock). The cons of course is that you're restricted to that company's stock only.  If you want to buy McDonald's stock for the rest of your life, then by all means just open a DRIP account with them.  I will only be buying dividend stocks that are good buys at the time of purchase, so having a DRIP account for each company I'm buying would not be efficient.  If you are interested in a company sponsored account, then I would suggest you start here: 


Periodic Investment:
When I first opened my Sharebuilder account, I started with just $50/ month.  Every month Sharebuilder would take $50 out of my bank account and put it into my brokerage account.  When a dividend stock I wanted to purchase got to a price level I felt was a buy, I would use the money in the account to purchase the stock. Over the years I have increased that amount, but I was amazed at how quickly that $50/ month added up.  It's great if you have a large amount of money to invest at one time in dividend stocks, but I'd recommend committing to a periodic investment as well. This adds to the compounding affect, and will keep you committed to the investing process.  I'd suggest starting with a small amount and increasing it based on your comfort level.  You'll be surprised how fast it grows.

Research Tools:
Any online brokerage account like Sharebuilder or ETrade will have research tools for you to use.  I occasionally use Sharebuilder's tools, but I mostly just use Yahoo Finance and SeekingAlpha.  Yahoo Finance is a great resource for stock quotes and important financial numbers we will care about.  Seeking Alpha is an excellent sight where others post their opinion on the market and specific stocks.  And both are free, which my inner Scrooge always loves.

Sorry to keep harping on this, just want to make sure you understand that this is a slow process.  Once we have our brokerage account and are allocating top performing dividend stocks on a regular basis, we just have to sit back and be patient and watch our number of shares and dividend payouts increase each year.  

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