Dividend investing is one of the most reliable ways to build long-term passive income. Instead of waiting for a stock’s price to rise, dividend investors purchase shares in stable companies that pay out a portion of their earnings to shareholders on a regular basis. Here is a beginner’s guide to starting your own dividend portfolio.
What is a Dividend?
When a large, profitable company makes money, it can reinvest it or distribute it to owners. A dividend is a cash payment made directly to your brokerage account for each share of stock you own. For example, if a stock pays a $1 annual dividend and you own 100 shares, you will receive $100 a year in passive income.
Key Dividend Terms to Know
- Dividend Yield: The annual dividend payment divided by the stock price, expressed as a percentage. If a stock costs $100 and pays a $4 annual dividend, the yield is 4%.
- Dividend Growth Rate: How much the company increases its dividend payment each year. You want to invest in companies that increase their payout regularly to beat inflation.
- DRIP (Dividend Reinvestment Plan): An automated setting that uses your cash dividends to purchase more shares of the stock, compounding your wealth over time.
How to Start
Open an account with a commission-free broker like Robinhood. You can buy individual dividend-paying stocks (like Johnson & Johnson or Coca-Cola) or buy a dividend ETF like **SCHD** (Schwab U.S. Dividend Equity ETF), which automatically holds a diversified basket of top dividend-paying companies.