How to Invest in Dividend Stocks [2024] Dividend Stock Investing 101 

Stock investing is a popular way to make your money go farther and to try to ensure that your family’s needs will be met going forward. In fact, according to the Federal Reserve, around 58% of U.S. families held some form of stock in 2022. 

Whether or not you’re part of this percentage of investors right now, learning the ins and outs of investing can help you build a nest egg for your future. 

The good news is that you can choose from a wide variety of investment options, dividend stocks being one of them. To help you understand whether dividend stock investing could be a good fit for your financial goals, let’s explore what dividend stocks are, how they work, and how to invest in dividend stocks.

What Are Dividend Stocks?

Dividend stocks are a type of security that pays out dividends. Essentially, these are payments that publicly traded companies pay out to their investors or shareholders when they generate profits. Think of dividend stocks as income you can earn, much like you would with interest you earn from a certificate of deposit or a savings account. 

Dividend stocks tend to be issued by larger companies that have proven to be consistently profitable.

And if you’d like to explore the other ways you can invest in stocks, check out our guide on how to invest in stocks.

How Do Dividend Stocks Work?

You become a shareholder of a dividend stock by purchasing shares of one or by purchasing dividend stock funds, typically through your brokerage. Each company chooses how often they’ll pay dividends to their shareholders, though typically you’ll receive them quarterly. 

Some companies may pay out special dividends, which are one-time payments. You may receive these for reasons such as the company earning record profits as a way to distribute them among shareholders. 

To find out about a company’s dividend-paying schedule and other policies, you can check announcements in their filings with the Securities and Exchange Commission (SEC). Companies may also announce upcoming dividend payouts through press releases that you may be able to find on their websites. Many finance websites publish lists of these dates, too, and you should also receive notices of upcoming dividend payouts if you’re a stockholder.  

There are some features that are important to remember when it comes to how dividend stocks work:

• Read up on payment dates, as this is when investors will receive dividend payments.
• Determine the record date and ex-dividend date (these are often the same day). The record date is when the company records all its shareholders while the ex-dividend date is the deadline for dividend payment eligibility. To receive a dividend payment, you must have purchased the stock at least two business days before the record date and at least one business day before the ex-dividend date.
• See if there are limits on dividends you can receive, such as if there are circumstances when investors won’t receive dividends. 

In most cases, companies that pay dividend stocks will set a date when they will announce their plans. You can set reminders if you want to know what these companies plan on doing so you can read their announcement when it comes out. 

If you want to find out a company’s overall performance over time when deciding what to invest in, you can learn how to read stock charts to help you.

How to Invest in Dividend Stocks

Investing in dividend stocks is typically straightforward. It starts with choosing a brokerage and determining how to invest in dividend stocks that will help you reach your goals. 

Open a Brokerage Account

Most brokerage companies offer dividend stocks and allow you to open an account online. You’ll need to provide information such as your full name, contact details, and Social Security number. 

Before opening a brokerage account, see which one offers the features you want and need. Check out our Robinhood review and our Public review to explore a couple of options. Once you’ve decided, follow the instructions from the brokerage to open an account.

Choose Your Dividend Stocks

The good news is that it’s relatively easy to select which dividend stocks you want to invest in! That’s because most online brokerage companies offer educational material that’s easily accessible toward beginners, including stock screeners and detailed information about investment yields. 

To start, you can consider purchasing shares in Dividend Aristocrats. These are companies that are part of the S&P 500 and have shown increases in dividend payouts in the past 25 years. 

Or, many brokerage companies offer dividend funds. So instead of purchasing individual stocks, you can get a fund that includes different shares of companies that offer dividends. In many cases they’re grouped together by categories such as industry or company size. You may even be able to purchase funds that house Dividend Aristocrats. 

Fund Your Brokerage

After determining what you want in your portfolio, see how much you’ll want to start investing in dividend stocks or funds. If you don’t have a budget, this is a great time to set one up. Then you’ll know for sure exactly how much you can afford to invest. Check out our Rocket Money review to see if this app could be the right fit for your budgeting needs.  

Then, fund your brokerage account — in most cases you can do an online transfer. After the money lands in the account, you can purchase the stocks or funds you want. 

Regularly Monitor Your Account

Monitoring individual stocks can be helpful so you can see their overall performance as well as how your portfolio is doing. You can also see when dividends are to be paid and whether these payments are increasing over time. In addition, checking your accounts can help you see if any of the companies you’re invested in decide to eliminate dividend payouts. 

If need be, you can rebalance your portfolio, which is a fancy way of saying you can buy and sell stocks to ensure you’re reaching your investment goals. A buy-and-hold strategy is the safest way to go for most investors. But if you are interested in stock trading, you can read How to Trade Stocks to learn whether this investing style could make sense for you. 

Who Should Invest in Dividend Stocks?

Whether you’re a seasoned pro or just beginning to understand investing for beginners, dividend stock investing can be a great fit for many investors. This is especially true if you’re interested in receiving regular payouts from your investments and want to hold onto your stocks or funds over time.

As with all types of investing, there are risks associated with investing in dividend stocks. Some of these risks include not receiving dividends or receiving less than you had expected, depending on the company’s performance. You may also be tempted to invest only in dividend stocks, but diversifying beyond them is generally advised so you can maintain a balanced portfolio. Alternative investments can be a great way to diversify. 

Before making any decisions, it’s important to assess the risks and understand what can happen once you start investing.

What Are the Pros and Cons of Dividend Investing?

Part of learning how to invest in dividend stocks is knowing the benefits and drawbacks of doing so, so let’s explore them. 

Pros

• You’ll generally receive regular payments.
• It’s typically a less volatile investment than non-dividend-paying stocks.
• You’ll be able to choose from individual stocks or dividend stock funds.
• You can take advantage of compounding interest over time by reinvesting dividends. 

Cons

• You may receive less dividends than expected.
• Your dividend income may be taxed.

Commonly Asked Questions About How to Invest in Dividend Stocks

Should a Beginning Investor Invest in Dividend Stocks?

A beginning investor can absolutely invest in dividend stocks! But they’ll need to understand that there are risks involved. Investing in individual dividend stocks may require more research and upfront money and therefore may not be the best choice for beginners. 

That said, beginners can dip their toes into investing in dividend stocks by purchasing dividend funds. This strategy means that an investor’s portfolio will be more diversified with a single purchase and can spread out more risk compared to investing in individual stocks. 

Best Way to Invest in Dividend Stocks for Beginners? 

The best way to invest in dividend stocks for a beginner is to start by finding dividend stock funds. These are often grouped by different sectors or even size of companies. To help you learn more about how to invest in dividend stocks, brokerage accounts even offer educational material so you’ll be able to determine the best strategies for your situation.

If you’re unsure how dividend stocks can play a part in your overall financial goals, consider hiring professional help. Reading What Is a Financial Advisor? can help you decide whether you could benefit from the assistance of one of these pros.

Investing in Dividend Stocks With Little Money?

Yes, it’s possible to start investing in dividend stocks without a lot of money. While you may not be able to purchase individual stocks, you may be able to purchase shares of dividend funds. These may have minimum purchase amounts though, so be sure to check out what those are before funding your brokerage account. 

What Should Dividend Stock Investors Know About Taxes?

Dividend payouts may be subject to taxes, though how much you may have to pay will depend on the type of dividend you receive. Your dividend payouts may also be taxed if they’re held in a taxable brokerage account rather than in tax-sheltered accounts like IRAs. Be sure to consult a tax professional to see what you’ll be responsible for when it comes to taxes. And if you’d like to learn more about IRAs, check out How to Open a Roth IRA.