How do I Invest in Dividend Stocks?

Dividend paying stocks give you current cash flow.

Dividend paying stocks give you current cash flow.

Stock market investors have a number of ways to profit from their selections. When the stocks they buy go up in value, those investors can sell their shares and realize an immediate profit. Investors can also continue to profit from the stocks they hold by collecting the cash dividends. Many companies reward their stockholders by sharing a portion of their profits in the form of dividends, and choosing those stocks can give you current cash flow as well as the potential for future appreciation.

Items you will need

  • Financial publication
  • Mutual fund prospectus
  • Mutual fund application

Individual Stocks

Step 1

Turn to the stock tables in a quality financial publication like Barron's or the Wall Street Journal. No matter which publication you use, be sure the stock tables include columns for both dividend and dividend yield.

Step 2

Go down the list of stocks carefully, seeking out companies that have a strong dividend yield. You can use the current interest rate on bank CDs and Treasury bonds as your benchmark. Investing in stocks that pay more than those instruments can boost your yield. The downside, of course, is that stocks are not guaranteed the way Treasury securities and CDs are, and your stocks could be worth more or less when you sell them.

Step 3

Choose a number of stocks for further research, based on both their dividend yield and anything else you know about them. It is important to do your homework on any dividend paying stock. The dividend yield might be artificially high because the stock has suffered a steep decline in value. If the company is in financial trouble, there is a good chance it will cut or even eliminate its dividend, so it pays to be cautious.

Step 4

Log on to your online brokerage tools to do further research about the stock. Some brokerage firms provide investors with research tools, and access to annual reports and other financial statements. If not, you can request a copy of the annual report from the firm's investor relations department. You might also have access to stock screening tools that allow you to select dividend paying stocks and find more possibilities for investment.

Step 5

Go to the trading menu when you are ready to make your purchase. Enter the ticker symbols of the stocks you wish to buy, then the number of shares. Review the purchase details carefully, then send your order for processing. Keep copies of all your purchase confirmations with your tax and financial records.

Mutual Funds

Step 1

Call the mutual fund company where you have your other investments, as well as several other low cost firms. Request prospectuses for their dividend funds. Most mutual fund companies have at least one or two funds devoted to dividend paying stocks. The funds employ managers whose job it is to seek out companies that pay a solid dividend.

Step 2

Review the prospectus carefully, especially the sections detailing total return, dividend yield and expenses. The total return includes not only dividends but growth in the share price of the funds holdings as well. The dividend yield is the percentage of income you can expect to see if you invest in the fund. Keep in mind, however, that the dividend rate is not guaranteed, and that it will fluctuate along with the fortunes of the companies contained in the portfolio. Expenses are important as well, since high expenses can really eat into the return you see in your account.

Step 3

Choose the fund you want to invest in and complete the application. Some funds allow new clients to enroll online, while others require a paper application. Indicate on the application whether you want to receive your dividends in cash or use them to buy more shares. If current cash flow is your goal, the former option is probably best.

Step 4

Submit your completed application, along with your initial deposit, to the address listed on the form, or submit the application online. Keep copies of all your purchase confirmations with your tax records. You will need this information to compute your capital gains when you sell.

Tip

  • The dividend income you receive is taxable unless the dividend stocks and funds are held in a tax-deferred account like a 401k or IRA.

About the Author

Based in Pennsylvania, Bonnie Conrad has been working as a professional freelance writer since 2003. Her work can be seen on Credit Factor, Constant Content and a number of other websites. Conrad also works full-time as a computer technician and loves to write about a number of technician topics. She studied computer technology and business administration at Harrisburg Area Community College.

Photo Credits

  • Jupiterimages/Photos.com/Getty Images