How to Prepare Yourself for Dividend Investing
Be prepared before you invest your money in dividend stocks.. As a careful dividend stock investor, follow this process to minimize your risk and maximize your return: Assess your risk tolerance, choose your approach, gather some cash, and maybe even team up with an experienced partner or advisor.
Gauge your risk tolerance
Every investor has a different comfort zone. Prior to investing in anything, you can benefit by determining whether you’re more of a thrill-seeker, a conservative investor, or someone in between.
When gauging your risk tolerance, you should consider the following factors:
Age: Younger investors can generally take bigger risks because they have less money to lose and more time to recover from lousy investment decisions.
Wealth: If you’re relying on the money you’re investing to pay your bills, send Johnny to college, or retire soon, you’re probably better off playing it safe.
Personality: Some people are naturally more risk-tolerant than others. If you tend to get worried sick over money, a low-risk approach is probably more suitable for you.
Goals: If your goal is to reap big rewards quickly, you may conclude that the risk is worth it. If your goal is to build wealth over a long period of time with less chance of losing your initial investment, a slow, steady approach is probably best.
Choose the right approach
Tossing a bunch of ticker symbols into a hat and drawing out names of the companies you want to invest in is no way to pick a dividend stock. Decide on the type of investment approach to take: value, growth, or income.
The value approach is like shopping at garage sales. Investors hope to spot undervalued stocks — stocks with share prices that appear to be significantly lower than they’re really worth. When hunting for values in dividend stocks, investors look for strong earnings growth, high yields, low price-to-earnings ratios, a solid history of raising dividend payments, a solid balance sheet and sufficient free cash flow.
The growth approach to investing in the stock market focuses on a company’s prospects for generating future earnings. These companies are expected to see their revenues and profits grow at a pace faster than the rest of the market. Growth investors are well advised to consider revenue growth, projected growth, profit margins and realistic share price projection.
The goal of income investing is to obtain a steady and relatively secure income stream. When purchasing equities, focusing on income means buying stocks that pay dividends. Because most growth companies don’t pay dividends, most income investors are basically value investors that not only want to buy at a good price but also look for a high yield and a solid history of rising dividend payments.
Collect capital to fuel your investments
Before you can invest in anything, you need some cash. Most investors gather investment capital the old fashioned way — they earn it. After paying their bills, investors save part of their remaining income in a bank account, a retirement account, stocks, bonds, or mutual funds.
Don’t let that capital burn a hole in your pocket. You decide when, in what, and how much to invest, so spend some time shopping for the right stocks before buying. Rushing the process significantly increases the risk of losing money.
Team up with a seasoned pro
Many people don’t feel comfortable managing their investments by themselves. Some investors want an investment advisor to consult with and bounce ideas off of, and others want to understand the process but leave the actual details to the professional. Experienced investment advisors can offer you a wealth of advice and information on most areas of financial planning, including taxes, insurance, and strategies that have been successful for them.