How to Invest in Dividend Stocks - SmartAsset (2024)

There are many investing strategies out there. One popular way of going about investing for those who want to earn income is to invest in dividend stocks. These are stocks that pay out money to investors regularly — often quarterly, but sometimes in other increments. Investing in dividend stocks works the same way as other investments, but does require a certain strategy.

What Are Dividend Stocks?

Dividend stocks are stocks that regularly pay dividends to their investors. Companies that pay dividends tend to be established and consistently earn a profit. Dividend payments are often monthly, but they can use other schedules, such as monthly or semiannually.

Dividend stocks don’t necessarily have the highest returns, but investors often appreciate their dependable income. Tech stocks fresh out of an IPO can have eye-popping share price appreciation, but these companies don’t usually pay dividends. Dividend stocks can fill in the gap while investors wait for their portfolios to grow.

The reason dividend stocks are often quarterly is they are often publicly traded companies that hold shareholder meetings once per quarter. This is when we find out if a company earned a profit in the previous quarter. If so, the company’s board can elect to share its profits with shareholders in the form of dividends.

How to Invest in Dividend Stocks

There are several ways to invest in dividend stocks. The easiest way is to buy shares of a dividend stock in a brokerage account, although that is not necessarily the best way. For instance, you can also buy dividend stocks in an IRA. Here is a quick rundown of ways to buy dividend stocks.

Invest in Companies that Pay Dividends

As mentioned, investing in dividend stocks can be as simple as buying shares of the companies that regularly pay them. Some companies have been paying dividends for years, so you can probably expect that to continue. In fact, some companies are sometimes referred to as dividend aristocrats because they have increased their dividends for at least 25 consecutive years.

Of course, companies with a long history of paying dividends are names you have likely heard, such as Coca-Cola, Proctor & Gamble and Eli Lilly. Since these are publicly traded companies, you can invest in the account type you choose – a brokerage account, IRA, an HSA, etc. However, there can be tax consequences (more on that later).

Invest in Dividend ETFs or Mutual Funds

While it is possible to invest in individual companies that pay dividends, it may not be the most convenient. After all, it requires you to find the companies on your own and then do the work of investing in each of them. As an alternative, there are mutual funds and exchange-traded funds (ETFs) that specialize in dividend stocks.

For example, you can buy shares in the SPDR S&P Global Dividend ETF (WDIV) or the iShares Core High Dividend ETF (HDV). These ETFs are highly diversified and already pay consistent yields, so the work is already done for you.

High Payout vs. Dividend Growth

There is no “right” way to invest in dividend stocks. There are numerous dividend stocks and dozens of dividend ETFs. Among dividend ETFs, there are dozens of choices, all with different strategies. For example, some dividend ETFs might simply focus on high payouts. Others are dividend aristocrats or dividend appreciation ETFs. The latter focuses on dividend stocks that have consistently increased their dividends.

There are different philosophies behind investing in each type of dividend ETF. Of course, dividend ETFs with high payouts tend to have the highest dividend yields. But high dividend yields aren’t everything. Dividend aristocrats, for example, provide stable, long-term dividend growth, which can make for a more sustainable dividend investing strategy. Thus, the best choice depends on your preferences and investing goals.

Tax Considerations

Dividends provide a regular income, but there can also be tax implications. You generally report any dividend income on stocks you hold in a brokerage account on your tax return. The tax rate you pay on dividends depends on the type of dividends you receive.While some dividends are taxed as ordinary income, qualified dividends are taxed at a lower rate. The ordinary income tax rate is 10% to 37% for 2022 to 2023. The rate can be lower for qualified dividends, such as 0%, 15% or 20%.

If tax avoidance is your top priority, you can hold dividend stocks in a tax-advantaged account, such as an IRA.

The Bottom Line

Dividend stocks are consistently profitable companies that share their profits with investors. Rather than relying solely on share price appreciation for returns, they provide investors with regular income. Though quarterly dividends are most common, they can also be monthly or semiannual. While some dividend stocks have high payouts, others, known as dividend aristocrats, focus on consistently increasing dividends. There are multiple ways to buy dividend stocks, such as with individual positions or dividend ETFs and mutual funds. Ultimately, the choice comes down to personal preferences and goals.

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