The traditional way to make money is to get a good education and find a job that pays a good salary. However, you can make extra income by investing in certain stocks and earning a dividend income. If your stocks do well, the extra income could be reinvested or saved for retirement.
How to Earn Dividend Income
The main way to earn dividends it to invest in stocks that regularly pay them. Making dividends through investments can be difficult because the companies whose stocks you bought need to make a profit. Then, the companies decide how to use their profits, such as buy back stock or send money, dividends, to each of their investors.
Investors who make money through dividends look for companies that are likely to increase their dividend amounts each year. Ideally, as a company’s profits grow, the dividends they pay out should increase in value.
The money earned from dividend income can be used for anything the investor wishes. It can be set aside in an IRA, used to pay bills, or reinvested. The more shares of a dividend stock that you own, the more money you will make if they clear a profit and decide to pay out dividends to their investors.
The Process of Making Dividends
There are several steps that you should take to try to make dividends from the stocks you’ve chosen to buy.
Research Dividend Stocks
The first step in dividend investing is to choose stocks that make dividends, especially those that have increasing dividend amounts every year. A good way to begin your research is to look at a list of stocks and look under the “YLD” column, which is its dividend yield.
A dividend yield is a calculation of a company’s annual dividends which is divided by the current stock price. The calculation will yield the annual percentage rate of that stock’s dividend.
If you are new to investing, you can research stocks and make a list of those that have earned dividends each year and discuss them with a stockbroker. Be honest with the broker and let them know you are interested in dividend investing. He or she can help you select the best stocks to accomplish your goals.
How to Find Dividend Stocks
The best way to search for stocks that pay dividends is to use some of the tools that are available online. If you open a brokerage account, they usually have tools with information about stocks that have paid dividends and the dates that they were paid.
Companies who have paid dividends are required to report them to the United States Securities and Exchange Commission (SEC) via the Form 1099. The information includes the quarterly and yearly dividends paid the previous year.
Both the NASDAQ and New York Stock Exchange also have tools that provide dividend information. Information from the NASDAQ includes a dividend calculator, history information, and a way to screen for high-yield dividends.
The NYSE provides historical dividend information for stocks by searching previous dividend payments during a certain date range. This information can help you find the best dividend stocks in which to invest.
Other Factors to Consider
To try to ensure that you make dividend income, there are other factors to consider when choosing dividend stocks.
When choosing stocks, you want to invest in companies with lower debts, or liabilities, than their competitors or the industry’s average. If a company is deeply in debt, they are going to be paying more of their profits to lenders instead of to their investors. The information regarding a company’s debt will be on their annual report.
Research Earnings Share
A company’s earnings per share can provide information about their financial health. The earnings per share tell how much profit a company has made and to each share of its outstanding stock. The information is easy to find because it is included in the company’s annual report, which is on their website.
When you find the earnings per share, also look up the dividend per share they paid out. This information is also found in the company’s annual report. The dividend per share shouldn’t be any more than 80% of the earnings per share. If it is more than 80%, then it could be a sign that the company is not doing well financially.
Check Companies Current Ratios
Another way to judge a company’s financial health is to compare the ratio of their assets to their liabilities. This ratio shows the company’s abilities to pay their short-term debts. The information is easy to find as it is listed on the balance sheet of the annual report. If their current ratio is greater than one, then the company is doing well.
Buy Stocks with High Dividends
After researching dividend stocks chose those that have shown good profits over the last five years and who have a history of paying out high dividends. Then, consult with a broker as they will be the ones placing the orders for you.
The orders can be placed via a broker that you hire to handle your investments or, if you have some experience with the stock market, you can open an online brokerage account. Even though you are choosing the stocks to buy, a broker is the one placing the orders through the NASDAQ or NYSE.
There will be fees for placing orders, so look up what they are before choosing the stocks. Before opening an online brokerage account, read all the information you can about each one, compare their fees, and select one from which to place orders. If you’re new to the stock market, consider going through a stockbroker instead in case you have questions about your investments.
Managing Your Money
When you’re investing in dividend stocks, you need to be smart about managing your financial accounts. You want to spend less money than you earn from dividends, so when you receive them, pay yourself first. Set aside some of the money in an IRA or money market account, then use the rest to purchase more stocks.
You should plan to save about 10% of the dividends you make. So, if you earn $4,000 per year in dividends, reinvest about $3,895 of that amount. If you’re getting paid dividends each month, do the same thing. By reinvesting the money, you could end up making significantly more income each year.
Create Emergency Fund
Stocks don’t always do well despite the solvency of a company. To help offset losses in the market, keep a year’s worth of expenses in a savings or money market account. If there is a downturn in the market, your savings will help you meet your financial obligations.
When you need to dip into your emergency fund to pay expenses, make sure to replace the money. If you pay out $45,000 per year in expenses, you should have that much in your emergency fund. If you need to spend some of it, always replace it, so you are prepared for the next emergency.
Invest Excess Savings
If your savings start climbing above a year’s worth of expenses, take the excess and invest it in stocks. You could buy more of the dividend stocks that are doing well in your portfolio, or you could diversify and buy other stocks.
Another way to use the excess money is to open a retirement account. Having an Individual Retirement Account, IRA, allows you to save money for your retirement outside of an account that you may have with your job. Most people do not spend 20 or 30 years at the same job anymore, so having an IRA is a safety net you can use for your retirement no matter where you’re working.
Create a spreadsheet to keep track of the stocks that you buy. Include information like:
- The price paid for the stock.
- The dividend yields for each stock.
- The price stocks sold for if you sold any of them.
- Income you made from the stocks.
- Losses you might have had.
Much of the information on the spreadsheet can be used for tracking how well your investments are doing, but it will be needed for tax purposes too.
Create Cash Flow Budget
You need to keep records of how much you’re making from your investments. The budget should list your expenses, the income that is projected for each stock you’ve bought, and income from other sources, such as your job.
If the income you make each month from your job and dividends cover your expenses, you should be able to reinvest some of the profits that you’re making. However, if you’re not doing well, you can consult with your stockbroker or make adjustments to your portfolio.
Before putting any money into the stock market, take the time to research all the factors listed above. Use the free tools at your disposal and read all the information you can about the stocks in which you’re interested to see if they have the potential to provide you with a dividend income.