In this post, we go through what a dividend stock is and how to get rich on dividend stocks so that you can start building your own dividend portfolio.
Remember that future returns can never be guaranteed and that investments always involve a risk.
The post should therefore be seen as inspiration and not as financial advice.
So, how do you make money with dividend stocks?
You become rich in dividend stocks by getting a good return on your investments in the form of dividends. If you invest in companies with a good dividend history, ie who have distributed money even during recessions or even stock market crashes and who have not reduced and at best increased their dividends over time.
When you also reinvest your share dividends, you build a stable money machine with the help of time.
By reinvesting the dividends is meant that you buy new shares instead of consuming the money you receive in dividends.
Either you buy more shares in companies you already own or you buy shares in new companies with a good dividend history and direct return.
In this way, you constantly get more shares which pay dividends in turn and which hopefully also increase their dividends every year.
In the long run, it will “rain large sums of money” on you too.
Check out the video below to learn more:
What is a dividend and why do you want it?
One of the most common ways to make money on shares is by taking part in a so-called share dividend.
The profit that the companies make and that do not need to be reinvested in the business can be distributed to the shareholders in the form of dividends.
Historically, it has been so-called “mature” companies that have distributed money.
Such companies have usually been profitable over several years and are either so large that they can no longer grow as much or because they simply do not need to invest as much money to grow, and can therefore distribute the remaining capital to shareholders.
Take part in dividends or sell shares?
The reason why it is popular to create a portfolio with distributing companies is because you then receive income on an ongoing basis without having to sell your shares.
If you were to sell shares before the dividend, it means that you have fewer shares the next time the dividend arrives, and since the dividend is set in an amount per share, you will then receive less money as current income.
If you are thinking long-term, it can therefore be a good idea to keep your shares and take part in the dividend instead of selling shares.
It is a great advantage to have current income if you want to try to live on your dividends because you do not have to actively sell off your assets, but it rolls on by itself.
Where does the dividend come from?
In order for a company to be able to increase its share dividend over time, it is required that the company also increases its profit.
If, for example, the company were to distribute money but not make a profit, then the cash would soon be empty and the company would then be forced to either reduce or stop paying dividends altogether.
It is important to remember that the long-term dividend capacity depends on the company’s profitability.
If the company does not make any money, there is no money to distribute, so it is important that the company does well and makes a profit in the future.
As always when buying shares, you should read beforehand to know what you are buying.
When will the dividend arrive?
The companies that pay dividends in Sweden, (where I live), almost always distribute in connection with the Annual General Meeting.
For the vast majority of companies, this occurs sometime in the spring.
If you have planned to live on dividends, it may be an idea to try to spread your incoming dividends over the year. In the US, it is more common for companies to pay their dividends throughout the year.
A common scenario is, for example, to pay dividends every quarter, but there are also companies that pay dividends every month.
If you mix Swedish and foreign companies, you can therefore take part in more dividends over the year and it can thus make it easier when you have to live on your dividends.
Check out this video on the highest paying monthly dividends:
Why are they called dividend shares / stocks?
Dividend shares are usually popular because they provide a steady income for the shareholders.
If you also reinvest the dividend in new shares, it can mean even larger dividends next year, and so on.
Deliberately buying stocks that pay regular dividends is a well-used strategy among many savers.
What is yield and why should you care about it?
When talking about dividends and dividend shares, the word direct return is often mentioned. Direct return is a measure of how large the dividend is in relation to the share price.
You get a direct return on a share by dividing the dividend per share by the share price.
You can find this information in the information for a share, or on the share overview with your bank or securities broker.
Yields are often used as a measure to quickly compare dividends on different shares against each other, where a high yield is often considered positive but more risky.
Is the highest dividend yield the best?
It can be tempting to buy a portfolio consisting of the stocks that have the highest dividend yield, but a high dividend yield is not everything. If a company has a much higher dividend yield than others, this does not have to be something positive.
Since the dividend yield is affected by the share price, shares with a low price and a high dividend will have a high dividend yield.
The price of a share is governed by expectations of how the company will fare in the future.
Learn more about what affects a share’s price in the video below:
Yield is simply just a measure of how large the dividend is in relation to the price.
When looking at companies with high dividend yields, it is important that you look closely at the company’s operations so that the company will continue to earn and distribute money also in the future.
What type of company fits into a dividend portfolio?
When we talk about a dividend portfolio, we generally mean a portfolio of companies with stable income and steadily growing dividends. In the US, it is popular to talk about so-called “dividend champions”.
Dividend champions are companies that have raised dividends every year for at least 25 years in a row.
Here are some examples:
Recap: Dividend investors
Those who focus on investing in dividend stocks are usually called dividend investors and their portfolios are dividend portfolios.
In short, they invest in companies that distribute a relatively large part of their profits and where the shares have a high direct return.
Their goal is to be able to live on the dividends.
A company’s share dividend can be paid quarterly, semi-annually or annually.
The most common is annually, ie that you as an investor receive a dividend once a year, but more and more companies are starting to divide the share dividend into twice a year.
Spring is usually the big highlight of share dividends that all dividend investors look forward to.
There is talk of the rain of money, which refers to all dividends that “rain over one”.
Abroad, in the USA for example, it is common for companies to distribute money quarterly or monthly. As mentioned, there are also Swedish companies that have chosen to have a quarterly share dividend.
Some dividend investors try to keep cash flow even and choose shares that distribute more often than semi-annually or annually.
If your goal is to be able to live on your dividends, it can be good to keep this in mind when you invest.
Is there any limit to investing in dividend shares
There is really no limit to your ability to invest in dividend stocks. Instead, you can assume that there are plenty of options to choose from.
Something that really allows you to focus on the most important things. Finding the stocks that allow you to get a dividend and thereby increase your capital.
Just remember to read about it properly. Because it makes a bigger difference than you might think it does.
Namely, no one wants to miss that dividend shares, after all, are relatively safe, even if there are risks with such.
Also, check out this video if you wanna learn more on how to make money on dividend stocks: