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Do you want dividend investing and do not know how to start?

Are you invested in mutual funds in your ROTH or traditional IRA account? Are you sick of seeing their mediocre performance? Have you been recently thinking about picking up and investing into individual stocks?

If you responded to those questions YES, but have no clue what to do and where to start, read on.

If you are inexperienced in investing into individual stocks you need to start by answering a simple question:

“What do you want from your investments?”

Find your strategy first

You need to define your investing strategy first and a goal you want to reach. And here I do not speak about a goal for which you are saving and investing but the goal of how your portfolio and adopted strategy should look like once you are fully invested.

Once you set up an investing goal, you will enter into an accumulation phase of investing. At this point, your goal and strategy should be set, otherwise you will fail.

Believe me, I’ve been there, so I am speaking from my own experience.

To demonstrate what I am talking about, I am going to show you my own selection process. Originally, I believed that I could make money and get rich trading stocks. So I wanted to trade. And I selected and studied a swing trading strategy.

As I was losing money and slowly realizing that the swing trading is not my nature of investing (it didn’t fit my investor’s profile) my next thinking was how to make more cash to be able to to use it for more trading. How to make my portfolio to produce a cash flow.

Cash flow!

The magic word was out.

Cash in hand is king

“Will I be able to generate enough cash flow trading stocks?” was my next question. Well, my past performance proved that I wouldn’t be able to do that.

Then, a dividend growth investing strategy popped up to me and I instantly knew that this was it.

With dividend strategy you do not care that much about underlying stock as long as the company pays dividends.

OK, you are thinking that you won’t be experimenting with trading or other strategies. You want income which you can be reinvesting for next 20 years and then enjoy a reliable, untouched, and ever coming stream of income.

But what’s next?

How to start?

35 Dividend Growth StocksIf you want to know where to go next, which stocks to start with, I would recommend you an e-book by a fellow blogger Dan Mac 35 Top Dividend Growth Stocks. The book, he wrote, is available for Kindle edition and it is an inexpensive review of the strategy and metrics he uses when evaluating dividend stock candidates. It follows an old investing adage: “Keep it simple stupid”. The metrics he lists are basically the same or similar to those all dividend growth stock investors use.

The second part of the book shows great candidates to start with. If you invest to some of those stocks, you won’t make a mistake.

I am not affiliated with Dan and I am recommending his book because I remember my own struggle when I started investing and thinking “what stocks I should buy first?

I am a lazy person and I still like to choose my stocks by reviewing of what stocks others invest in and what they have to say about those companies. Then I want to keep it simple. I take stock selections others mentioned in their reviews and add them into my watch list for further studying or review. A great source of stocks and analysis can be found on another great blog Dividend Growth Stocks provided by a dividend investor and blogger Dividends4life. You can also check other bloggers from my blogroll who periodically write up their stock analysis, such as Dividend Monk, Dividend Engineering, or Dan’s blog Dividend Growth Stock Investing. On those web sites you will find tons of dividend growth stocks to start building your watch list. And of course, you can use my own dividend stocks watch list too.

The stories about each of the 35 Top Dividend Growth Stocks in the second part of Dan’s book along with his listed metrics will give you a great starting insight into your first stocks. With this book you will no longer ask the question “How to start investing?”

I have my watch list, what’s next?

Once you create your watch list, the process is easy. Based on how much money you have available in your account, select one, two, three or more stocks you will invest in and look at them closely. If you use metrics Dan lists in his book, just compare those stocks current values with those metrics. Do they look better than listed or worse? If they look better than those listed, it is a great time to buy your first initial position.

A dividend itself can also help you to find out, whether the stock is undervalued or overvalued. Let’s take a look at an example of Johnson & Johnson (JNJ). About a year ago the stock traded in a range around $65 a share and the dividend yield was around 3.6%. If you have your yield threshold set at 3.5% for example, you would be allowed to invest in this stock. As the JNJ price ran up, the yield dropped down to 2.9% at one point. As of this writing the yield is 3.0%.

Your strategy won’t allow you investing in this company anymore. It is too expensive and you have to wait for the company to do two things:

  1. The price to drop and yield go back up above your 3.5% threshold, or
  2. The company raise its dividend so the new yield will be again 3.5% or more.

Of course this is just an example, but it can help you keep it simple. As you progress over time, you will be adding more metrics to your strategy and polish it into perfection.

Good luck and start reading about dividend growth stocks and learn how to invest in them. You will beat the market by doing it.

22 responses to “Do you want dividend investing and do not know how to start?”

  1. Nice overview Martin! For the average investor who has neither the expertise or time to spend researching individual stocks and monitoring a portfolio of multiple stocks, mutual funds or ETFs are the way to go. A good dividend growth fund like Vanguard’s VDIGX is outperforming the S&P 500 and with an expense ratio of .29% is a good option.

  2. […] @ Investing into Stocks – Hellosuckers writes Do you want dividend investing and do not know how to start? – Are you invested in mutual funds in your ROTH or traditional ITS account and are you […]

  3. Si vous voulez commencer à investir de dividende, je dirais que vous devez d’abord choisir votre objectif d’investissement. Sélectionnez ensuite quelques bonnes actions versant des dividendes qui peuvent vous aider à atteindre vos objectifs.

  4. […] Hello Suckers gives us a primer on how to start dividend growth investing. […]

  5. Little House says:

    We started trading stocks a few years ago and didn’t feel that we were that successful at it. Instead, these past two years, we’ve focused on mutual funds. I’ve picked one in particular that’s a stellar fund and super safe – I think that’s my nature when it comes to money – be safe!

    • Martin says:

      Little House, of course every investor should find his/her style and what fits you the best and keeps you Ok instead of freaking out every now and then. So if the funds work for you the best, stay with it. I am planning to give my stocks 20 – 25 years time to work for me. I believe in this time frame they will be successful. Maybe not stellar or run home hitters, but will make me money (mainly by dividends).

  6. Weekly Recap – July 12th, 2013 | Common Cents Wealth says:

    […] Hello Suckers: Do you want dividend investing and do not know how to start? […]

  7. CI says:

    Hey Martin!

    Nice introduction to investing, specifically dividend and income investing. This strategy is surely not for everybody, and other strategies also work (index investing). But really it’s all about your goals. Mine is to build a passive income stream so naturally I’m interested in dividend stocks, bonds, and preferred stocks. There is no right or wrong strategy which is important to realize.

    You will definitely learn more over time. I have honed my strategy considerably in the last 3 years and I’m sure it will continue!

    I recommend starting with companies you already know for those who are beginning. McDonald’s, Coca-Cola, Procter & Gamble, etc. Actually I’ve been at this a while and those are still the stocks I am comfortable basing my retirement on!

  8. This is quiet comprehensive, I have few stocks for dividend play, looking to buy more on every dip. Was waiting for annual summer dip but so far its not that much down.

  9. Michael says:

    Thoughts on dividends vs. total return? The downside of dividends is that they produce an ongoing drag (in the form of taxes) on your portfolio. If the company instead reinvests and grows their value, you could wind up with the same net increase in portfolio value without the tax consequences.

    • Martin says:

      But you will get hit by tax when you start selling and withdrawing your let’s say 4% every year during the retirement time. So I think it doesn’t matter when you pay the tax whether now on dividends or later on your gains, right?

  10. Thanks for the information Martin and the books! I thought about dividend and like you mentioned I just didnt know enough about them and was simply to lazy. But having those resources will make it a little easier to get into with my portfolio. I will probably pick 2-3 stocks and watch them for 6 months to get in the hang of how things go. Again nice post.

  11. Hey Martin, I just wanted to let you know I nominated you for a Liebster Award: http://pretired.org/my-story/wow-two-liebster-awa

  12. Very nice overview Martin! I have part of our portfolio in some solid dividend payers and reinvest them to buy in more shares. I think they can be a great way to bring in value to your portfolio, especially if you go with the more solid ones.

    • Martin says:

      I agree, the so called blue chips and dividend payers with a long long dividend history won’t let you down even if you are no that proficient in analyzing them.

  13. Thank you for the information Martin. I have been getting more and more intrigued by dividend investing and this article is helping me get my mind wrapped around it. Thank you.

    • Martin says:

      Grayson, thanks for stopping by, and I am happy that the article can help. It is surprisingly easy when you try investing in lieu of trading. As Ben below mentioned, for trading you would need a lot more time to succeed. With dividend stock investing, it is a lot easier. And with the blue chips you won’t make a mistake. So jump on it. The only thing what can bother (me) is that such investing needs time. It won’t make you rich quickly unlike trading. But, on the other hand, trading can make you poor very quickly too.

  14. Ben says:

    Good point about learning that trading is not in your nature. Many of us must learn that the hard way. You can make money trading, but it’s a full-time job and can be very difficult to put into practice. Long-term investing is much easier on your stress level and portfolio levels.

    • Martin says:

      Ben, I wish I could learn it to soft way without losing thousands and thousands of cash. I read a lot of books about dividend investing and almost all of them point out that reinvested dividends boost your portfolio like a rocket engine, so why not let that power do it’s job. As Carl Richards (thanks for your post mentioning him) says, why check the roots of a tree every time a little wind blows, right?

  15. FI Fighter says:

    Like most things in life, getting started is the hardest part. Thankfully, with the advent of the internet, it has become so much easier to do research. Blogs such as your own, and sites like Seeking Alpha have made the idea of investing in dividend stocks so much more accessible. It doesn’t take much research to figure out what stocks most everyone is buying (e.g. PG, KO, JNJ, CVX, MCD). It’s also helpful when investors are kind enough to share their portfolio online.

    Ultimately, the person wanting to get started just have to pull the trigger and do it!

    • Martin says:

      Exactly. Sometimes I think like I am doing something wrong when just looking around and investing into stocks without performing analysis. But the net is full of guys who already did it, so why reinventing the wheel. Just look at their numbers and compare it to your limits and criteria and here you go, here are your stocks to invest!

  16. Jake @ Common Cents Wealth says:

    This is a great overview. Dividend investing is intriguing to me, but I’m not sold on what strategy fits in best with my life goals.

    • Martin says:

      Jake, sometimes it is hard to decide and set the strategy. I have had this issue myself in the past and it really took me a lot of time (and even more money) to find out. Now I am totally satisfied and obsessed with what I am doing on the market. I just wish I had more free cash to invest more.

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