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?
If 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:
- The price to drop and yield go back up above your 3.5% threshold, or
- 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.
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