Dividend Investing Guide

Dividend Investing Guide - How to Invest in Dividend Paying Stocks 11/4/19, 12(35 AM
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Dividend Investing Guide –

How to Invest in Dividend
Paying Stocks
Posted by John Schroeder (https://cashmoneylife.com/author/john/) Last updated on May 28, 2019
| Stocks (https://cashmoneylife.com/category/investing/stocks/)
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Dividend investing is one of the more popular ways investors generate income to
grow their investment portfolio. Many large, established companies issue dividend
payments to shareholders. These dividends are issued as cash, which can be used
https://cashmoneylife.com/dividend-investing/ Page 1 of 41
to cover living expenses, or reinvested into more stock, thus compounding your
investments.
This Dividend Investing Guide examines dividend investing in more detail, showing
you how dividend investing can become a part of your investing strategy.
Table of Contents
Investing in Dividend Stocks

Once a company reaches its growth potential, the focus of the organization generally
changes. Instead of using earnings to grow and expand the business, management
may decide to start paying out dividends to shareholders.
This type of activity is very common in the natural business life-cycle, as a company
can no longer maintain sizable growth. By no means is this a negative indicator of
the organization, but is generally viewed as a good sign the company can sustain its
earnings.
Let’s take a closer look at what are dividends and how they can benefit the investor.
What are Dividends?

A stock dividend is a distribution of a company’s earnings paid out to its
shareholders. Announced by the company’s board of directors, dividends are used
to distribute profits to the owners of the company – the shareholders.
When a company decides to declare a dividend, it is a clear sign that management

feels the company can no longer grow as fast as in the past. In order to retain
shareholders as the growth of the company begins to slow, the profits are paid out in
the form of dividends.
There are several advantages to investors who invest in dividend-paying stocks.

First, they can serve as an alternative source of income
(https://cashmoneylife.com/alternative-income-streams-are-important/) that can
help supplement monies earned from a job. Secondly, a company that has a history
of paying a dividend is generally viewed as a stable investment. While there are no
guarantees, knowing a company has the cash to continue to increase dividends
every year is a good sign.
Types of Dividend Paying Stocks

There are several different flavors of dividend-paying stocks that are worth
mentioning. Some companies are set up such that they pay almost all of their
earnings out in dividends, while others focus on balancing dividends with the growth
of the company. Each type has its advantages and disadvantages.
Here are a few types of dividend stocks that are popular amongst traders.
Blue Chip Stocks – Blue chip dividend stocks are generally considered to be the
most stable of income stocks. Companies that have had a tradition of raising their
dividend payout annually for 25 or more years
(https://cashmoneylife.com/what-is-a-dividend-aristocrat/) would fall into this
category. While the dividend yield may not be as high for many of these companies
as a REIT or Income Trust, investors typically find more stability and less risk
investing in these types of securities.
Dividend Paying ETF – An ETF (Exchange Traded Fund

(https://cashmoneylife.com/investing-in-etfs/)) is a traded security that has the
characteristics of an index mutual fund but actually trades like a stock. Many income
investors seek out ETFs that specialize in dividend paying stocks. Investing in a
dividend paying ETF can help diversify a portfolio while providing a source of
income.
REITs – A Real Estate Investment Trust (https://cashmoneylife.com/real-estate-

investment-trust-reits/) or REIT is a publicly traded company that purchases real
estate assets such as offices, apartments, and even mortgage loans. Based on their
tax classification, a REIT is required to pass the majority of their earnings on to
shareholders in the form of dividends. Based on their high yield, REITs are often a
popular choice for dividend investors.
Mutual Funds – Many mutual funds also pay dividends. Each stock held within the
mutual fund would issue dividends which are then distributed to the fund, which
distributes them to the shareholders. Some mutual funds focus their strategy on
dividend-paying stocks, while in other mutual funds, it is simply a by-product of the
stocks the fund holds in its portfolio.
Companies in Many Industries Pay Dividends – Paying dividends to shareholders

is usually a sign of the company’s maturation and stability. This makes dividends
less common with small companies, start-ups, and companies that are using the
cash flow to fund more research and development and growth.
That said, you can find dividend paying stocks in a variety of industries, including
basic materials, consumer goods, financial, healthcare, industrial, services,
technology, and utilities.
How Often Do Companies Pay

Dividends?
Not only do dividend stocks differ in how they operate, but the frequency of the
dividend payments also varies among companies. Here are a few of the most
common dividend payout frequencies.
Monthly Dividend Paying Stocks – Many income trusts like CanRoys

(Canadian Royalty Trust (https://maplemoney.com/canadian-royalty-
trusts/ )) pay their dividends on a monthly basis. Investors looking for a steady
monthly income stream may want to explore assets in this category. CanRoys,
REITs, and other trusts usually fall into this category, as they want to quickly
pass along their earnings to shareholders.
Quarterly Dividend Paying Stocks – The most common dividend payout

frequency is quarterly. Many blue chip stocks distribute their dividend
payments four times each year.
Onetime Payments – In some special circumstances, a company may

announce a one-time special dividend payment. These payouts are not usually
recurring and are a result of large cash balances a company is looking to
distribute.
Important Dividend Investing

Calculations
Those who invest in dividend-paying stocks should become familiar with several
financial calculations, in addition to common ones like the price to earnings ratio.
Here are some of the commonly used calculations and ratios that an income investor
should understand.
Dividend Yield, or Current Yield

The current yield of a company represents the ratio of dividends paid out per year
compared to the current share price. The yield of a stock fluctuates as the stock
price moves up and down as well as when a company raises or lowers their dividend
payout.
While an important ratio when analyzing stocks that pay dividends, the current yield
can be misleading for investments that you already own. In order to calculate the
true return on investment, an investor should understand the yield on cost.
Yield on Cost
Calculating the yield on cost for dividend stocks in your portfolio will help determine
your return on investment. While the dividend yield is an important factor when
analyzing a new income stock, it doesn’t help all that much for ones that you already
own.
The dividend yield is calculated using the current share price of the stock. Instead of
using the current share price, the average share price that was paid for the stock
should be used to calculate the yield on cost. The results of this calculation will
represent the shareholders’ true return on investment instead of what the stock is
currently yielding.
Calculating the yield on cost is a critical step that should be performed periodically
by dividend investors to evaluate the return of their portfolio.
Dividend Payout Ratio

The dividend payout ratio (DPR) is another important calculation that lets investors
know if earnings can support the dividend. The DPR takes the dividends per share
amount and divides it by the earnings per share. Growth companies that pay a small
dividend will tend to have a lower dividend payout ratio compared to a well
established blue chip company.
As a general rule of thumb, most successful dividend investors avoid companies

with a dividend payout ratio above 50% or 60%. Anything above that mark means
the company may not be investing enough capital back into the organization. Even
though a company’s growth has slowed, it is still critical to reinvest a portion of
earnings back into the organization.
How to Use Dividend Yield to Inform

Your Investment Strategy
Dividend Yield is one of the most widely used financial ratios to track income
stocks. Dividend yield can help you to establish the actual worth of your stocks and
the risks and rewards associated with your investments.
This section will define dividend yield, show you how to calculate it, and explain how
you can use it to inform your investment decisions.
What Is Dividend Yield?

Dividends, or the payments shareholders receive from the companies they invest in,
can be assessed using the dividend yield.
The dividend yield, also referred to as the current yield,

represents the annual dividends paid out by a company in
relation to its share price.
Basically, it is the return on investment that an investor could expect to get if they
invested in the stock at the current price and the company continued to pay out the
same dividend.
The calculation assumes that the company will not make any dividend cuts and will
either maintain the current payout or increase its distribution to shareholders.
While not a perfect representation of a company’s return on investment, the dividend

yield is an important ratio that all income investors must understand.
Knowing how to calculate stock dividend yield can help you decide on the best
investment route for your money.
How to Calculate Dividend Yield

Most income growth investors can easily pull the current yield of a company by
looking up the stock information on financial websites or the company’s investor site.
Another option is to actually run the calculation by hand to compute the current
dividend yield of a stock.
The following equation can be used to calculate a stock’s current yield –
Yield = Annual Dividends Per Share / Price Per Share
Now, let’s plug an example into the equation to see how it works.
If a stock has paid out $1.00 in dividends per share over the past 12 months and is
currently trading at $25 per share, the current yield would equal .4 or 4%. This
equation is represented below.
Current Yield = $1.00 / $25, or 4.0%
The Current Yield fluctuates as the stock price fluctuates. For example, if the stock
price above increases to $30, the Current Yield would be 3.33% ($1/$30 = 3.33%). If
the stock price were to decrease to $20, the Current Yield would be 5.0% ($1.$20 =
5.5%).
You can also easily run the calculation by increasing or decreasing the dividend
payment, or both variables.
It is important to note that the current yield is constantly changing for a stock, as it
relies on the share price (which is always moving up and down). An investor who
purchased the stock at a higher price six months ago will have a much lower return
(yield) on their investment (assuming the dividend remained constant) than someone
who recently invested in the company. On the other hand, investors who bought at a
lower share price (than the current price) would have a higher yield on their
investment.
Dividend Yield Applies to Preferred and

Common Stocks
The dividend yield can be used for both preferred stocks and common stocks. While
there are several differences between preferred stocks and common stocks, one
stands out in the discussion of dividend yield.
With preferred stock, a corporation provides a set dividend, giving you a clearer idea
of how much you will yield.
Unlike the preferred stockholder, as a common stockholder, you receive voting

privileges for the number of shares you own and the dividend can fluctuate.
Due to that difference, preferred stockholders can have a better idea of how much
they will yield from the onset.
You can also use the equation to determine the trailing dividend yield and the
forward dividend yield, which look at historical yield and projected future yield,
respectively.
Since the common dividend is not a set value for common shares, you can look at
the previous yields to gain insight.
Most Recent Full-Year Dividend/ Current Share Price= Current Yield
If you’re a common shareholder, here’s your best bet for tracking your potential
dividend yield:
source: Wikipedia (https://en.wikipedia.org/wiki/Dividend_yield)
Share prices change and dividend increases and cuts occur frequently, but these
measures can still serve as helpful analytical tools in your decision-making process.
Use Dividend Yield to Identify Stocks to

Purchase
Using the dividend yield is most effective for investors identifying new investment
options. It is a way to compare multiple income stocks against each other,
regardless of their sector or industry.
For example, an income investor can compare the dividend yield between a banking
stock and an energy stock, which will help guide the investment decision.
Which Industries Have the Highest Dividend

Yield?
For the investor open to any industry, trends in dividend yields can help suggest
which field to invest in.
Based on common sense (and historic yield data), industries with steady
foreseeable profits tend to have higher dividend yields than less predictable ones.
In other words, as research implies (https://www.cnbc.com/2014/07/20/what-

stock-sectors-offer-the-best-dividends.html), you can depend on people paying
for staples even in times of need, so industries like telecommunications and utilities
are safe moneymakers no matter the economic climate.
Entertainment, communication, and more basic needs like electricity and water yield
high dividends and will continue to thrive, making those industries solid investment
choices.
But, what about less predictable industries?
Using popular screening techniques like S&P, we can see the yields of corporations
and industries.
The American Association of Individual Investors, commonly known as AAII, screens

companies to measure yields as well. AAII suggests
(http://www.aaii.com/journal/article/stocks-with-high-relative-dividend-
yields.touch) looking at the following characteristics:
Marked history of growing dividends
A successful current yield in comparison to the historic yield
Profits ahead of the field’s normal earnings
Below average liability
Using those characteristics can help you determine which corporations you might
want to invest in. The AAII screens top-20 dividend yields ranged from about 3% to
7%, to provide some insight.
With a bit of research on a corporation’s website, you can find the company’s annual
dividends.
Plug those into the dividend yield equation with the current share price, then see
how the current yield stacks up against the criteria above.
Figures change, but if the dividend yield checks off the aforementioned boxes, you
could be looking at a worthwhile investment.
Which High-Dividend Shares You Should Avoid

While determining what shares to avoid investing
(https://cashmoneylife.com/what-is-investing/) in may be a bit more challenging,
there are a few tips to keep in mind.
Looking at the checklist above raises an important point for dividend investment:
A high dividend yield percentage does not automatically equal a

lucrative investment.
It’s critical to look at how that yield has changed over time and how it competes with
other corporations in the industry.
Sometimes dividend stocks soar, but long-term success is bound to more than a
high yield percentage. When a stock’s dividend yield is unusually high, look at the
reasons why.
With that information in mind, use the dividend yield formula and compare how the
yield has changed over time.
As you can see, high-yielding dividends can be misleading.
Also, you may want to proceed with caution with one particular investment industry:
Real Estate Investment Trusts (https://cashmoneylife.com/real-estate-
investment-trust-reits/).
As analysts suggest (https://www.forbes.com/sites/brettowens/2017/12/13/3-

top-monthly-dividend-stocks-for-2018-and-1-to-avoid/#2f3857e10368), REITs
like Realty Income can house dangerous investments under the guise of impressive
monthly payments and a recent upswing in dividend worth; however, they actually
yield lower than competitors and can’t keep up with technologically advanced
industries.
To recap, avoid falling into dividend yield traps by comparing dividend yields to past
figures, growth rates, and competitors.
Determining Dividend Cuts

The current yield can also alert investors of a future dividend cut. As the share price
of a stock decreases, the yield will initially rise (in some cases over 10%).
Since this ratio is calculated using past dividend performance, a drop in share price
could be the first signal that a company is considering a cut. It can take several
weeks for the yield to actually represent this type of event.
Alternatives to the Current Yield

The current yield of a stock is often used to estimate the return on investment based
on the current share price. The calculation also assumes that the annual dividend
payout over the past 12 months will remain constant.
While there are plenty of stocks that maintain or even raise their dividends, there will
also be many companies that cut or eliminate dividends. A stocks share price will
also continue to rise and fall, making the current yield a moving calculation.
One alternative that is commonly used in place of the current yield is the yield on
cost (YOC). This calculation represents the return on investment based on what the
investor actually paid to own the stock.
For example, consider blue chip growth stocks. Blue chip stocks are those which
come from established companies with typical earnings in the billions who are
considered financially stable for investment.
In the case of blue chip companies, the YOC can be much higher than the actual
yield that a stock is currently returning.
Current Yield is Just One Factor to Consider

When Investing
Understanding how the dividend yield is calculated and what it represents is
beneficial for investors of dividend paying stocks.
The ratio represents the annual dividends paid out by the company in relation to its
current share price.
As an independent investor, you can use this value to help make investment
decisions and understand the return on investment that you could earn by
purchasing a stock.
Consider calculating dividend yield in determining your next investment.
How to Calculate the Yield on Cost of a

Dividend Stock
While the current dividend yield of a stock is readily accessible on any financial
website, the yield on cost (YOC) is specific to your individual investments.
The dividend yield is calculated by taking the annual dividend of the stock and
dividing it by the current share price. While this ratio can be an important metric,
there are some flaws. First, it is a constantly changing number which makes it
difficult to track. As the share price fluctuates, so does the current yield.
Another drawback of the dividend yield is that since it follows the current share price
of the stock, it doesn’t really help an investor who already owns shares. This is
where the YOC can come in useful for an investor, as it tracks the yield of the stock
in relation to what you paid to own it.
Since the yield on cost represents each investor differently, it won’t be found on any
financial website. Therefore, it is important for a dividend investor to understand how
to calculate this financial ratio so it can be used to make critical investment
decisions.
Yield on Cost Calculation

Calculating the yield on cost is a simple equation that takes two pieces of
information. First, you need to know what the annual dividend currently is set at for
the stock you are running the calculation on. If you don’t know what this is, check
with your online broker or on one of the financial websites.
The second number that you will need is your average cost per share of the stock.
You may need to do some figuring on your average share price, but your broker
should be able to provide this data. Once you have collected both pieces of data, the
following equation can be used to run the calculation.
Yield on Cost = (Annual Dividend / Average Cost per Share) * 100
As you can tell, the yield on cost equation is very simple and easy to calculate. It
provides important information that is tied directly to the current yield that you are
earning from owning the stock, not what the current yield states.
Example Yield on Cost Scenario

Let’s say that an investor purchased 20 shares of a dividend paying stock at $30 per
share. A few weeks later, the investor decided to take advantage of a drop in the
share price to dollar cost average down and purchased 20 additional shares at $26
per share.
The end result is that the investor now owns 40 shares of the stock at an average
purchase price of $28.
If the company has an annual dividend of $1.00 per share, then the yield on cost for
the investor would be equal to 3.57% based on the calculation below.
YOC = ($1.00 / $28.00 ) * 100
If the stock is currently trading at $30 per share, then the current yield would be
equal to 3.33%, which is lower than the YOC. As the company raises or lowers
dividends over time, the yield on cost for an investor will fluctuate and provide the
investor with a true return on their investment.
Yield on Cost is Another Piece of the Puzzle

Similar to the current dividend yield, the yield on cost of a stock provides helpful
information to an income investor. Unlike the current yield of a company, the YOC is
different for every investor who already owns shares of the stock. This financial
calculation can be very helpful as it gives the investor a true return on investment as
opposed to the yield on the current share price of a stock.
What to Look For When Investing in

Dividend Paying Stocks
Current Yield is one of the first things most investors look for in a dividend stock. You
will commonly hear statements such as, “… stock XYZ is yielding over 6%” … or, “…
stock ABC has a higher yield than its peers …”.
While there is no doubt the dividend yield can be a useful factor in selecting the top
dividend paying stocks, it is certainly not the most important.
There is actually a lesser known (but just as important) financial ratio that investors
can use to screen dividend stocks. This financial calculation is called the dividend
growth rate and can provide beneficial data for the investor.
What is the Dividend Growth Rate?

The dividend growth rate of a stock is the annualized percentage increase in
dividends for a certain period of time. For example, an investor may want to know
what the 5-year dividend growth rate of a company is for his/her analysis. The time
period for the calculation can be any desired interval (i.e. 5 years, 10 years, etc.).
On average, a company that has a solid history of strong dividend growth is more
likely to continue raising dividends compared to a company with slow or negative
dividend growth.
For example, a company that has consistently raised its dividend by 10% annually
for the past 10 years is likely to continue that trend. Assuming the trend continues,
investors would receive a 10% increase in income just by owning shares in the
stock.
When was the last time your job could guarantee you a 10% raise every year?
Why Dividend Growth is More Important than

Yield
The main drawback of relying solely on the yield of a stock is when the company
decides to cut its dividend. Most calculations use the annual dividends per share
paid out over the past 12 months divided by the current share price.
Since there is no guarantee the company will continue to pay the same amount of
dividends, the results can become skewed. So in reality, the yield is using the past
dividend performance and measuring it against the current value (or share price) of
the stock, which can be misleading to an investor.
Factoring in the dividend growth rate, on the other hand, can actually highlight
stocks that may have fallen off your radar. Many companies that have a double-digit
growth rate generally have below average current yields making them unattractive to
the common investor.
Let’s take a look at a company that has a current yield of 2.5% that has a growth
rate of 10%.
Consider the return on investment you would receive in 10 years as the company
increases its dividends by 10% annually.
Year 1 – 2.50%
Year 2 – 2.75%
Year 3 – 3.03%
Year 4 – 3.33%
Year 5 – 3.66%
Year 6 – 4.03%
Year 7 – 4.43%
Year 8 – 4.87%
Year 9 – 5.36%
Year 10 – 5.89%
Year 11 – 6.48%
As you can tell by the numbers above, in year 11 (10 years after the first increase),
your original investment would be returning almost 6.5% in dividends. Compare
those numbers with a stock that has a really high current yield and you won’t see the
same returns.
The bottom line is that factoring in the dividend growth rate can identify top-notch
dividend payers that give investors an annual raise that can’t be beaten.
Should investors only use the dividend growth rate to identify top dividend
stocks?
No. Neither should you use the current yield to make all of your investing decisions.
The reality is that both ratios are important factors in picking the top dividend stocks
for your portfolio.
However, the dividend growth rate does provide useful historical information that
provides more answers as to the direction the stock is heading.
Where to Buy Dividend Stocks

You can buy dividend paying stocks at a variety of brokerages, including online
discount brokers, full-service brokerages, and sometimes directly from the company
itself, through a Direct Stock Purchase Program
(https://cashmoneylife.com/direct-stock-purchase-plans/), or DSPP.
You can often save more money by purchasing stocks directly from the company.
However, you will have more paperwork to manage and may need to go through a
third-party company to manage your shares.
If you prefer to consolidate your holdings and have all your stocks and tax records in
one place, then you may prefer to buy your stocks through a brokerage firm. Here is
our list of top discount brokerages (https://cashmoneylife.com/best-discount-
brokerages/).
3 Ways to Save Money on Investing in

Dividend Stocks
Building a portfolio of dividend stocks is one of the best ways to build personal
wealth, not to mention a steady income stream.
One of the biggest concerns to dividend investors, besides which stocks to pick, is
the fees and commissions involved in building a stock portfolio. While online
discount brokers (https://cashmoneylife.com/best-discount-brokerages/) have
made it cheaper to invest, those $5 -$10 commissions for a trade can really add up –
especially for the small investor.
A $10 commission on a $500 investment means an investor is paying 2% of their

purchase in expenses. The whole point of dividend investing is to generate income
and a 2% charge wipes out most of your dividend payment. There are a few ways
that investors can help to save money investing in dividend stocks, which I have
listed below.
1 – Direct Stock Purchase Plans (DSPP)

Investing through a direct stock purchase plan
(https://cashmoneylife.com/direct-stock-purchase-plans/) (DSPP) has plenty of
advantages, most notably – no brokerage commissions or fees. Instead of buying
and selling stock using a broker, these direct purchase plans allow investors to buy
stock directly from the company in which they plan to invest in. There are a few one-
time fees often associated with setting up

these accounts, but they are minimal
compared to commissions charged by a
stockbroker.
Direct stock purchase plans are ideal for long

Save money with dividend
term dividend investors looking to build a solid
investing
portfolio. They help to keep expenses low and
allow investors the opportunity to reinvest any
dividend payments received. Most plans also offer the chance to set up automated
investments which will transfer money from a checking or savings account once per
month and purchase stock. This is a great way to dollar cost average into a position
over time as opposed to purchasing all shares once.
Each DSPP is different, with many being run by third party transfer agents. It is a
good idea to investigate the specific details of each company’s direct stock purchase
plan before investing. Direct stock purchase plans may not be for everyone, but they
do offer the investor an alternative way to invest at a fraction of the cost of traditional
brokerages.
2 – Dividend Reinvestment Plans (DRIP)

Another way to save money on dividend stocks is to setup a DRIP on each position.
A dividend reinvestment plan, or DRIP can be setup to automatically purchase
additional shares of stock from any dividends received with no commissions or fees.
As mentioned earlier, investors who open up a direct stock purchase plan can opt to
reinvest any dividend payments back into purchasing additional shares of stock.
Since there are no commissions charged on these purchases, the investor is able to
limit the amount of expenses needed to build a position in the stock.
Most discount brokers also offer the dividend reinvestment plan

(https://cashmoneylife.com/dividend-reinvestment-plans-drip/) option to their
clients. For example, I have selected to reinvest 100% of the dividend payments I
receive for all stocks in my portfolio in my Fidelity brokerage account. Since there
are no commissions charged on these purchases, I am able to earn compounded
interest on my investments at no cost. This allows me to not only save money on
purchasing more shares of stock, but it helps to automate more of my investing
which saves me time.
Direct reinvestment plans (and DSPP’s) also allow investors the opportunity to
purchase partial shares. Say you have $50 leftover, but the stock is trading at $100.
A DRIP will automatically purchase .5 shares so that you don’t have to wait until you
have enough funds to cover a full share.
3 – Dollar Cost Averaging

While it may sound more expensive, dollar cost averaging
(https://cashmoneylife.com/dollar-cost-averaging-pros-and-cons/) (DCA) can
actually save you money on investing in dividend stocks. Dollar cost averaging
requires the investor to make multiple purchases of stock as opposed to making a
single purchase.
However, if the purchases are well planned out, dollar cost averaging will make sure
the investor pays a fair price for a stock. I can’t tell you how many times I have
invested in a stock that has dropped almost immediately. Since incorporating DCA
into my investing (https://cashmoneylife.com/what-is-investing/), I have been
able to stabilize my price per share for each of my stocks, despite the added
commissions.
One way to dollar cost average without paying any commissions is through direct
stock purchase plans, as mentioned earlier. By setting up automated investment
options (which most plans offer), investors are able to purchase stocks each month
in smaller chunks. For example, instead of investing $600 in a company at one time,
investors can contribute $50 each month for a year and get the same results.
Purchasing a stock 12 times per year will make sure you are paying a fair price for a
stock.
Dividend Investing Tools – Using Data

to Choose the Best Dividend
Investments
Investing in the stock market can often feel like a full-time job if you don’t watch
yourself. There is so much information buzzing around out there about the stock
market and individual companies. From financial analysts predicting where the
market is heading, to daily news on individual companies – it can be hard to keep up
on your research.
While I do spend a lot of time each

month researching the overall market
and individual stocks, I have also
leveraged a couple of tools to help me
along. Some of these tools help me
save time while others save me
money. Some of these investment
tools
(https://cashmoneylife.com/free-
stock-trading-investing-tools/) are tangible and others are more of an investment
strategy.
I thought it would be helpful to list a few of these tools that save me time and money
building my investment portfolio. Here are 6 tools that are helping me build my
dividend income portfolio.
1 – Personal Capital – Free Online Portfolio

Manager
(https://out.cashmoneylife.com/personal-
capital?aff_sub2=)I recently started using
Personal Capital
(https://cashmoneylife.com/personal-
capital-review-online-portfolio-
management/) to track my net worth, asset
allocation, and portfolio holdings. This free
online money management tool
(https://cashmoneylife.com/free-online-
money-management-tools/) can
automatically aggregate financial data like
credit card balances, savings and checking account balances, and your investment
holdings.
Similar to Mint, Personal Capital can simplify your life

(https://cashmoneylife.com/personal-capital-vs-mint/) by giving you an overall
view of your personal finances. Users simply sync up their financial accounts with
Personal Capital and the tool does the rest.
After using the tool for just a short time, I have already found plenty of benefits for
tracking my dividend income portfolio. Since I hold stocks through multiple online
brokers (https://cashmoneylife.com/best-discount-brokerages/) (ie. Fidelity, Ally
Invest (https://cashmoneylife.com/ally-invest-review/), CapitalOne, etc.),

Personal Capital allows me to look in one place to check up on my portfolio instead
of having to login to multiple accounts.
Personal Capital offers both online access as well as through mobile apps. Setting
up an account is free, only takes a few minutes, and has saved me a ton of time in
just a few weeks. You can get a free Personal Capital account here
(https://out.cashmoneylife.com/personal-capital?aff_sub2=).
2 – Microsoft Excel
While Personal Capital helps simplify how I track my dividend stocks, there are
plenty of things it cannot do. I use Microsoft Excel to track my dividend stock
holdings and to calculate important ratios related to my portfolio. For example, I use
Excel to calculate my current yield on cost as well as my annual dividend income.
These are two important calculations that every dividend income investor should
know.
Each month after I make my monthly automatic investments and receive dividend
payouts, I update the spreadsheet with these transactions and let the spreadsheet
do the rest. Even with all the different online financial apps, I still find value in using
spreadsheets as tools to build my portfolio.
3 – Automatic Investment Plans

Since I am still in my allocation phase of building a dividend stock portfolio, I like to
use automatic investment plans (https://cashmoneylife.com/automatic-
investment-plan-advantages/). Every month I invest
(https://cashmoneylife.com/what-is-investing/) small chunks of money into a
variety of stocks (8 right now) at either no or very low costs. This tool helps to
diversify my portfolio by allowing me to spread my investment dollars around each

month. It is also a great way to dollar cost average your stocks and it saves me a ton
of time each month.
A few online brokers offer automatic investment plans but not all of them. Other
options include using a transfer agent (see below) or a platform like LOYAL3 (see
below).
4 – Dividend Reinvestment Plans (DRIP)

Another tool that I use is setting up DRIP’s on my dividend stocks. Setting up a DRIP
on your investment basically tells your broker to reinvest any dividend payments
from a stock back into more shares of that same stock. This tool helps me save time
since the reinvestment happens automatically. It also allows me to buy partial shares
of a company to keep my investment compounding sooner rather than later.
For more information on this investment tool, check out – What is a DRIP?
(https://cashmoneylife.com/dividend-reinvestment-plans-drip/)
5 – Transfer Agents
These are third-party entities used by publicly traded companies to keep track of
investors who own their stock. Instead of buying stock directly from a company,
investors can use a transfer agent to handle the transaction.
One transfer agent that I use every month is Computershare

(https://www.computershare.com/us/Pages/default.aspx). Through this transfer
agent, I invest in companies using direct stock purchase plans
(https://cashmoneylife.com/direct-stock-purchase-plans/) and DRIPS. Instead of

buying stock directly from the company or through one of my online brokers, I buy
partial shares each month using Computershare.
Depending on the company, investors can also set up automatic investment plans
when buying stock. In some cases, the company in which you are buying shares in
will even cover any commissions or fees. I currently invest in 3 different companies
each month through Computershare which allows me to slowly dollar cost average
(https://cashmoneylife.com/dollar-cost-averaging-pros-and-cons/) into a stock.
This method of buying stock also helps me save time each month and in many
cases saves me on investment fees and commissions.
It is important to note that a company will only use one transfer agent, which may or
may not be Computershare. A few other common transfer agents include –
American Stock Transfer & Trust Company, BNY Mellon Shareowner Service, and
Wells Fargo Shareowner Services.
Final Thoughts on Dividend Investing

Investing in dividend paying stocks can be a great opportunity to create a new
source of income. There are plenty of income-producing stocks ranging from
monthly paying REITs to traditionally stable blue chip stocks. Once an investor
decides to begin investing in income stocks (https://cashmoneylife.com/how-to-
invest-in-stocks/), it is important that they understand several ratios such as
dividend yield and yield on cost. These ratios can help investors analyze stocks that
they are considering buying or selling.
Do you invest in dividend paying stocks? What experiences can you share –
good or bad?
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Comments
1. Scott B says
Good article. When I first starting buying dividend stocks I was looking at the highest
dividend paying stocks in the 20%+ range. I couldn’t believe I was getting 25%
dividend yield on my money! It seemed too good to be true and it was. On one stock
I received dividend payments for a couple of quarters until the stock price dropped
90% and the dividend was cut to 1%. Lesson learned – don’t just look at the
dividend yield when there are other important factors to consider.
Reply
2. Andrew @ Money Crashers says
Dividend paying stocks seems to be all the rage lately. With the tough economy and
stock market, these stocks at least offer some form of “guaranteed money” that
hopefully will accompany a rise in the stock price. The one thing I’d keep in mind that
is risky with these stocks is that there is always the chance the dividend will be cut or
erased…meaning you’ll not only lose out on the dividend, but most likely also a drop
in stock price. That’s why it’s good to look into the dividend history of a company and
to see it’s consistency.
Reply
3. Robert says
I absolutely love dividend paying stocks. I especially like large-cap stocks that pay a
steady dividend, but may have been beaten down by recent short-term news.
I also follow a portfolio of dividend paying insurance companies on my site that have
had great returns over the last 9 months.
Reply
4. Pat S says
Awesome article. A great resource for dividend histories is dividend.com. It can

provide a chart which displays what the historical dividend increase for most
companies has been. Using this, you can basically see how if the dividend increases
continue and the P/E remains somewhat reasonable, the stock price increases as
well. Coupled with compounding reinvested dividends, and you have, what I believe
to be the recipe for an index crushing portfolio with very low volatility.
Reply
5. Kirk Kinder says
I am so glad to see this message out there. Too many investors look at the current
yield and leave it at that. Investors who accept a lower initial rate but buy companies
that constantly increase dividends end up with much better portfolio returns. I love
some of the indices like the Dividend Aristocrats that focus on companies that have
raised dividends for 25 years straight. There are only 60 of them out there, and they
are the bellweathers such as Coke, JNJ, Proctor and Gamble.
Just make sure that the dividend growth rate does not exceed the earnings growth
rate. That usually ends up with a dividend cut in the future or a misallocation of
capital.
Reply
6. Bryce @ Save and Conquer says
LOYAL3 looks kind of interesting, but I am still convinced that I am happier and
getting better returns with low-cost passive index funds than when I used to trade
individual stocks.
Reply
7. John Schroeder says
What type of returns are you getting with these index funds?
Reply
8. Bryce @ Save and Conquer says
Hi John, If I were younger and 100% invested in the Total US Stock market, I would
have received a 30% return last year. That is including the fund expenses of 0.05%.
Since I also have quite a bit of my portfolio in a short-term bond index fund for
downside protection, I received more like an 18% return last year. I am sure there
are many people who had better returns, but there are many who did worse.
Looking at the historic return since 1926 for a 50/50 stock/bond portfolio, the
average annual return over the past 88 years is 8.3%, with 17 years out of the 88
years having a negative return.
Reply
9. Jon @ Money Smart Guides says
I’ve heard of the Dividend Aristocrats but not the Dividend Champions. I’ll have to
check it out. It does make sense to follow closely as you mentioned, a company can
cut its dividend and the Aristocrats list won’t let you know about it until the end of the
year after missing out on possible dividends.
Reply
10. lily says
I am still convinced that I am happier and getting better returns with low-cost passive
index funds than when I used to trade individual stocks.
Reply
11. Fred Hayse says
I think your infatuation with yield on cost has little value. If you buy a stock at
$100/share yielding 4% at the time of purchase and the stock price doubles to $200,
the current market yield drops to 2%. What action are you taking by knowing that
you are earning 4% on cost versus 2% based on current market prices? Probably
nothing if that is your main criteria. In reality, as long as the tools you use to pick
stocks remains valid, you would be better off selling the stock, taking a capital gain
of $100 and buying $200 worth of a new different stock (assuming no taxes are paid)
that generates the 4% that you used as part of your original criteria to buy the
original stock in the first place. I’d rather be making $8 in dividends instead of $4 in
dividends, any day.
Reply
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What are dividends and how do they benefit investors?

What are dividends and how do they benefit investors?

What are the different types of dividend paying stocks?

What are the different types of dividend paying stocks?

Dividend Investing Guide - How to Invest in Dividend Paying Stocks 11/4/19, 12(35 AM

Dividend Investing Guide –

Investing in Dividend Stocks

What are Dividends?

When a company decides to declare a dividend, it is a clear sign that management

There are several advantages to investors who invest in dividend-paying stocks.

Types of Dividend Paying Stocks

Dividend Paying ETF – An ETF (Exchange Traded Fund

REITs – A Real Estate Investment Trust (https://cashmoneylife.com/real-estate-

Companies in Many Industries Pay Dividends – Paying dividends to shareholders

How Often Do Companies Pay

Monthly Dividend Paying Stocks – Many income trusts like CanRoys

pass along their earnings to shareholders.

Quarterly Dividend Paying Stocks – The most common dividend payout

Onetime Payments – In some special circumstances, a company may

Important Dividend Investing

Dividend Yield, or Current Yield

Dividend Payout Ratio

As a general rule of thumb, most successful dividend investors avoid companies

How to Use Dividend Yield to Inform

What Is Dividend Yield?

The dividend yield, also referred to as the current yield,

While not a perfect representation of a company’s return on investment, the dividend

How to Calculate Dividend Yield

The following equation can be used to calculate a stock’s current yield –

Yield = Annual Dividends Per Share / Price Per Share

Current Yield = $1.00 / $25, or 4.0%

Dividend Yield Applies to Preferred and

Unlike the preferred stockholder, as a common stockholder, you receive voting

Most Recent Full-Year Dividend/ Current Share Price= Current Yield

source: Wikipedia (https://en.wikipedia.org/wiki/Dividend_yield)

Use Dividend Yield to Identify Stocks to

Which Industries Have the Highest Dividend

In other words, as research implies (https://www.cnbc.com/2014/07/20/what-

But, what about less predictable industries?

The American Association of Individual Investors, commonly known as AAII, screens

Marked history of growing dividends

A successful current yield in comparison to the historic yield

Profits ahead of the field’s normal earnings

Below average liability

Which High-Dividend Shares You Should Avoid

A high dividend yield percentage does not automatically equal a

As you can see, high-yielding dividends can be misleading.

As analysts suggest (https://www.forbes.com/sites/brettowens/2017/12/13/3-

Determining Dividend Cuts

Alternatives to the Current Yield

Current Yield is Just One Factor to Consider

Consider calculating dividend yield in determining your next investment.

How to Calculate the Yield on Cost of a

Yield on Cost Calculation

Yield on Cost = (Annual Dividend / Average Cost per Share) * 100

Example Yield on Cost Scenario

YOC = ($1.00 / $28.00 ) * 100

Yield on Cost is Another Piece of the Puzzle

What to Look For When Investing in

What is the Dividend Growth Rate?