Dividend Investing Guide – How to Invest in Dividend Paying Stocks

Dividend investing is one of the most popular ways investors generate income and grow their investment portfolios. Many large, established companies pay dividends to shareholders. These dividends are paid in cash, which you can use to cover living expenses or reinvest in more stock, 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.

Investing in Dividend Stocks

Once a company reaches its growth potential, its focus generally shifts. Instead of using earnings to grow and expand the business, management may decide to pay dividends to shareholders.

This activity is very common in the natural business life cycle, as a company can no longer maintain sizable growth. This is not necessarily a negative indicator, but it is generally viewed as a good sign that the company can sustain its earnings.

Let’s take a closer look at what dividends are 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 declares a dividend, it signals that management believes the company can no longer grow as fast as in the past. To retain shareholders as the company’s growth slows, it pays out profits as dividends.

There are several advantages to investors who invest in dividend-paying stocks. First, dividends can provide an alternative source of income that supplements a job. Second, a company with a history of paying dividends is generally viewed as a stable investment. While there are no guarantees, knowing a company has the cash to keep increasing dividends each year is a good sign.

Types of Dividend-Paying Stocks

Several flavors of dividend-paying stocks are worth mentioning. Some companies pay out almost all their earnings as dividends, while others balance dividends with growth. Each type has its advantages and disadvantages.

Here are a few types of dividend stocks popular among traders.

Blue Chip Stocks – Blue chip dividend stocks are generally considered the most stable of income stocks. Companies that have raised their dividend payout annually for 25 or more years fall into this category. While the dividend yield may be lower for many of these companies than for a REIT or Income Trust, investors typically find more stability and less risk in these securities.

Dividend-Paying ETF – An ETF (Exchange Traded Fund) is a traded security that has the characteristics of an index mutual fund but trades like a stock. Many income investors seek out ETFs that specialize in dividend-paying stocks. Investing in a dividend-paying ETF can diversify a portfolio while providing income.

REITs – A Real Estate Investment Trust, or REIT, is a publicly traded company that purchases real estate assets such as offices, apartments, and even mortgage loans. Because of their tax classification, a REIT must pass most of its earnings on to shareholders as dividends. Because of their high yields, REITs are often popular with dividend investors.

Mutual Funds – Many mutual funds also pay dividends. Each stock in the mutual fund pays dividends, which the fund then distributes to shareholders. Some mutual funds focus their strategy on dividend-paying stocks, while in others, dividends are simply a by-product of the stocks in the fund’s 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 for small companies, start-ups, and companies that use cash flow to fund more research, development, and growth.

That said, you can find dividend-paying stocks in various industries, including basic materials, consumer goods, financial, healthcare, industrial, services, technology, and utilities.

How Often Do Companies Pay Dividends?

Dividend stocks differ not only in how they operate, but also in how often they pay dividends. Here are a few common dividend payout frequencies.

• Monthly Dividend Paying Stocks – Many income trusts like CanRoys (Canadian Royalty Trust) pay their dividends monthly. 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 because they want to pass earnings to shareholders quickly.
• Quarterly Dividend Paying Stocks – The most common dividend payout frequency is quarterly. Many blue-chip stocks pay dividends four times a year.
• One-time Payments – In some special circumstances, a company may announce a one-time special dividend payment. These payouts are usually not recurring and result from large cash balances a company wants to distribute.

Important Dividend Investing Calculations

Investors in dividend-paying stocks should become familiar with several financial calculations, including the price-to-earnings ratio. Here are some commonly used calculations and ratios that an income investor should understand.

Dividend Yield, or Current Yield

A company’s current yield is the ratio of annual dividends paid to the current share price. A stock’s yield fluctuates as the stock price changes and when a company raises or lowers its dividend payout.

While an important ratio when analyzing dividend-paying stocks, current yield can be misleading for investments you already own. 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 dividend yield matters when analyzing a new income stock, it doesn’t help much for stocks you already own.

The dividend yield is calculated using the stock’s current share price. Instead of using the current share price, use the average share price paid for the stock to calculate yield on cost. This calculation reflects shareholders’ true return on investment rather than the stock’s current yield.

Calculating yield on cost is a critical step dividend investors should perform periodically to evaluate their portfolio’s return.

Dividend Payout Ratio

The dividend payout ratio (DPR) is another important calculation that shows whether earnings can support the dividend. The DPR divides dividends per share by earnings per share. Growth companies that pay a small dividend tend to have a lower dividend payout ratio than a well-established blue-chip company.

As a general rule, 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 establish your stocks’ actual worth 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 an investor could expect if they invested in the stock at the current price and the company continued to pay the same dividend.

The calculation assumes the company will not cut dividends 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 find a company’s current yield by looking up stock information on financial websites or the company’s investor site.

Another option is to calculate the current dividend yield by hand.

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 paid $1.00 in dividends per share over the past 12 months and is currently trading at $25 per share, the current yield would be 0.04, 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 decreases to $20, the Current Yield would be 5.0% ($ 1/$20 = 5.0%).

You can also easily run the calculation by increasing or decreasing the dividend payment, or both variables.

Current yield constantly changes for a stock because it depends 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

Dividend yield applies to both preferred and common stocks. While preferred and common stocks differ in several ways, one difference stands out when discussing dividend yield.

With preferred stock, a corporation provides a set dividend, giving you a clearer idea of how much you will receive.

Unlike preferred stockholders, common stockholders receive voting privileges based on the number of shares you own, and dividends can fluctuate.

Because of that difference, preferred stockholders can better estimate what they will receive from the outset.

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 common dividends aren’t set, you can look at past yields for 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:

Share prices change, and dividends increase and decrease frequently, but these measures can still serve as helpful analytical tools in your decision-making process.

Use Dividend Yield to Identify Stocks to Purchase

Dividend yield is most effective for investors looking to identify new investment options. It lets you compare multiple income stocks, regardless of 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 investors open to any industry, dividend-yield trends can 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, 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 corporate and industry yields.

The American Association of Individual Investors, commonly known as AAII, also screens companies to measure yields. AAII suggests 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%, providing 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 which shares to avoid investing in may be a bit more challenging, a few tips are worth keeping 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 depends on 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.

As analysts suggest, REITs like Realty Income can hide dangerous investments behind impressive monthly payments and a recent upswing in dividend worth; however, they often yield less than competitors and can’t keep up with technologically advanced industries.

To recap, avoid dividend-yield traps by comparing yields to past figures, growth rates, and competitors.

Determining Dividend Cuts

Current yield can also signal a future dividend cut. As a stock’s share price decreases, the yield will initially rise (in some cases over 10%).

Because this ratio uses 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 many stocks maintain or even raise their dividends, many companies also cut or eliminate them. A stock’s share price will also continue to rise and fall, making the current yield a moving calculation.

One alternative commonly used in place of current yield is 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 come from established companies with typical earnings in the billions and are considered financially stable for investment.

For blue-chip companies, the YOC can be much higher than the actual yield a stock is currently returning.

Current Yield is Just One Factor to Consider When Investing

Understanding how dividend yield is calculated and what it represents helps investors in 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 a stock’s current dividend yield is readily available on any financial website, yield on cost (YOC) is specific to your individual investments.

The dividend yield is calculated by dividing the stock’s annual dividend by the current share price. While this ratio can be an important metric, there are some flaws. First, it constantly changes, which makes it difficult to track. As the share price fluctuates, so does the current yield.

Another drawback of dividend yield is that, because it follows the current share price, it doesn’t really help an investor who already owns shares. This is where YOC can be useful, as it tracks the stock’s yield relative to what you paid for it.

Since yield on cost varies by investor, you won’t find it on any financial website. Therefore, dividend investors need to understand how to calculate this ratio so they can use it 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 the current annual dividend for the stock you’re calculating. If you don’t know this, check with your online broker or a financial website.

The second number you need is your average cost per share. You may need to calculate your average share price, but your broker should be able to provide this data. Once you have both pieces of data, you can use the following equation to calculate it.

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

As you can see, the yield-on-cost equation is simple and easy to calculate. It provides important information tied directly to the current yield 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, the investor’s yield on cost would be 3.57%, based on the calculation below.

YOC = ($1.00 / $28.00 ) * 100

If the stock is currently trading at $30 per share, the current yield would be 3.33%, which is lower than the YOC. As the company raises or lowers dividends over time, an investor’s yield on cost will fluctuate and provide a true return on their investment.

Yield on Cost is Another Piece of the Puzzle

Like the current dividend yield, the yield on cost provides helpful information for an income investor. Unlike a company’s current yield, YOC differs for every investor who already owns shares. This calculation can be very helpful because it gives the investor a true return on investment, rather than the yield on the current share price.

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 the dividend yield can be a useful factor in selecting 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 calculation is called the dividend growth rate and can provide useful data for investors.

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 a company’s 5-year dividend growth rate for their analysis. The time period for the calculation can be any desired interval (i.e., 5 years, 10 years, etc.).

On average, a company with a solid history of strong dividend growth is more likely to keep raising dividends than 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 a stock’s yield is that the company may cut its dividend. Most calculations use the annual dividends per share paid out over the past 12 months divided by the current share price.

Because there is no guarantee the company will continue to pay the same dividend amount, the results can be skewed. In reality, the yield uses past dividend performance and measures it against the stock’s current value (or share price), which can mislead 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 with a double-digit growth rate generally have below-average current yields, making them unattractive to the average investor.

Let’s look at a company with a current yield of 2.5% and 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’s hard to beat.

Should investors only use the dividend growth rate to identify top dividend stocks?

No. You shouldn’t use current yield to make all your investing decisions either. In reality, both ratios matter when picking the best dividend stocks for your portfolio.

However, the dividend growth rate provides useful historical information that offers more insight into 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, 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 a third-party company to manage your shares.

If you prefer to consolidate your holdings and keep all your stocks and tax records in one place, you may prefer to buy stocks through a brokerage firm. Here is our list of top 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 for dividend investors, besides which stocks to pick, is the fees and commissions involved in building a stock portfolio. While online discount brokers 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 investors can save money when investing in dividend stocks, which I have listed below.

1 – Direct Stock Purchase Plans (DSPP)

Investing through a direct stock purchase plan (DSPP) has plenty of advantages, most notably: no brokerage commissions or fees. Instead of buying and selling stock through a broker, these direct purchase plans let investors buy stock directly from the company they plan to invest in. These plans often have a few one-time setup fees, but they are minimal compared to commissions charged by a stockbroker.

Direct stock purchase plans are ideal for long-term dividend investors looking to build a solid portfolio. They help keep expenses low and allow investors 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, rather than purchasing all shares at 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 offer investors 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 set up a DRIP on each position. A dividend reinvestment plan, or DRIP, can automatically purchase additional shares from dividends received, with no commissions or fees. As mentioned earlier, investors who open a direct stock purchase plan can opt to reinvest dividend payments to purchase additional shares. Since these purchases have no commissions, investors can limit the expenses needed to build a position in a stock.

Most discount brokers also offer dividend reinvestment plans 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 no commissions are charged on these purchases, I can earn compounded interest on my investments at no cost. This lets me save money by buying more shares and also automates more of my investing, which saves me time.

Direct reinvestment plans (and DSPP’s) also allow investors to purchase partial shares. Say you have $50 leftover, but the stock is trading at $100. A DRIP will automatically purchase 0.5 shares, so you don’t have to wait until you have enough funds to buy a full share.

3 – Dollar Cost Averaging

While it may sound more expensive, dollar cost averaging (DCA) can save you money on investing in dividend stocks. Dollar cost averaging requires the investor to make multiple stock purchases instead of a single purchase.

However, if the purchases are well planned, dollar cost averaging can help the investor pay 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, I have stabilized my price per share for each of my stocks, despite the added commissions.

One way to dollar-cost average without paying commissions is through direct stock purchase plans, as mentioned earlier. By setting up automated investment options (which most plans offer), investors can purchase stocks monthly in smaller chunks. For example, instead of investing $600 in a company once, investors can contribute $50 monthly for a year and get the same results. Buying a stock 12 times a year helps ensure you pay a fair price.

What is a Dividend Reinvestment Plan (DRIP)?

According to Investopedia, a DRIP is “A plan offered by a corporation that allows investors to reinvest their cash dividends by purchasing additional shares or fractional shares on the dividend payment date.”

For most dividend investors, setting up a DRIP is a great way to grow their investment with no action required. Depending on the stock and/or the brokerage firm, most dividend reinvestment plans allow the investor to purchase shares with no commission or fees. This can drastically cut down on expenses often required to build and maintain a profitable portfolio of dividend stocks.

Types of Dividend Reinvestment Plans

Believe it or not, a couple of different types of dividend reinvestment plans are available. One lets investors buy stock directly through the company, while the other requires a third party to invest.

Here are two popular DRIP investing methods.

1. Company Managed – Several companies run their own dividend reinvestment plans. These companies usually let investors buy shares directly through them, without a broker. They also let investors buy partial shares, which can be a great option if you don’t have much capital. Popular companies like McDonald’s Corporation and Procter & Gamble are just a few of the many publicly traded companies offering this service.
2. Brokerage Account – Most online discount brokerages allow customers to reinvest their earned dividends back into the stock at no cost. The broker’s incentive is to keep current clients by offering this feature, while the investor gets a discount on the expenses they would otherwise pay. Setting up a DRIP through an online broker usually takes just a few minutes, making it an easy-to-use investment tool.

Advantages of DRIP Investing

Many successful income investors use dividend reinvestment plans on at least a few stocks in their portfolio. A DRIP is generally easy to set up, which makes it a popular feature for investors.

Here are a few other advantages to DRIP investing –

• Purchase Fractional Shares – If an investor receives $20 from a dividend payment and the stock’s share price is $40, a DRIP makes it possible to purchase .5 shares. This lets the investor keep building their position by reinvesting all dividend payments immediately into the stock without waiting to buy a full share.
• Automated Stock Purchase – These plans can be set up to automatically reinvest dividend payments into the stock. The investor requires no action, making it a nice option for those of us with hectic lives. It generally takes less than 5 minutes to set up this feature with an online broker.
• Commission-Free – A great thing about dividend reinvestment plans is that they generally don’t require any commission. Most online brokers don’t charge commission fees when an investor reinvests dividends back into shares of the stock. This is great for the investor, as it lowers overall costs, and the broker can keep a customer longer by offering this feature.

Disadvantages of DRIP Investing

DRIPs can help investors automate dividend reinvestments while lowering commissions and other fees. There are many advantages to setting up dividend reinvestment plans but also a few disadvantages.

Here are a few disadvantages of DRIP investing –

• Diversification – Setting up a DRIP for the long term can prevent an investor from having a diversified portfolio. The investor must monitor stocks in their portfolio to ensure any dividends are automatically reinvested.
• Initiating New Positions – Many investors use dividend income to initiate a new position in their portfolio. Using a DRIP prevents this, as all income is reinvested back into the same stocks, leaving no money to open positions in new stocks.
• Tax Tracking can be a Hassle. You need to keep excellent records of your transactions if you invest with DRIPs outside of a tax-advantaged retirement account like a Roth IRA. Making multiple stock purchases each year can give you a very different cost basis for each lot of stocks you own. You can alleviate this hassle by investing in an IRA or another tax-advantaged account, using a brokerage such as Ally Invest, which offers tax management software, or keeping excellent records.

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 about the stock market and individual companies is buzzing around. From financial analysts predicting where the market is heading to daily news on individual companies, it can be hard to keep up with 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 are tangible and others are more of an investment strategy.

I thought it would be helpful to list a few tools that save me time and money as I build my investment portfolio. Here are 6 tools that are helping me build my dividend income portfolio.

1 – Personal Capital – Free Online Portfolio Manager

I recently started using Personal Capital to track my net worth, asset allocation, and portfolio holdings. This free online money management tool 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 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 a short time, I have already found plenty of benefits for tracking my dividend-income portfolio. Since I hold stocks through multiple online brokers (i.e., Fidelity, Ally Invest, Capital One, etc.), Personal Capital lets me check my portfolio in one place instead of logging in to multiple accounts.

Personal Capital offers both online access and 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 Empower (formerly Personal Capital) account here.

2 – Microsoft Excel

While Personal Capital helps simplify how I track my dividend stocks, it cannot do everything. I use Microsoft Excel to track my dividend stock holdings and calculate important portfolio ratios. For example, I use Excel to calculate my current yield on cost and my annual dividend income. These are two important calculations that every dividend income investor should know.

Each month, after I make my automatic investments and receive dividend payouts, I update the spreadsheet with these transactions and let it 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. Every month I invest small chunks of money into a variety of stocks (8 right now) at either no or very low costs. This tool helps diversify my portfolio by letting me 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. Other options include using a transfer agent (see below) or a platform like LOYAL3 (see below).

4 – Dividend Reinvestment Plans (DRIP)

Another tool I use is setting up DRIPs on my dividend stocks. Setting up a DRIP on your investment tells your broker to reinvest any dividend payments from a stock back into more shares of that same stock. This tool saves me time because reinvestment happens automatically. It also lets me buy partial shares of a company so my investment can compound sooner rather than later.

5 – Transfer Agents

These third-party entities help publicly traded companies track 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. I invest in companies using direct stock purchase plans and DRIPS through this transfer agent. Instead of buying stock directly from the company or through one of my online brokers, I buy partial shares monthly using Computershare.

Depending on the company, investors can also set up automatic investment plans when buying stock. In some cases, the company you buy 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 into a stock. This method also saves me time each month and, in many cases, saves me on investment fees and commissions.

A company will use only 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. Many income-producing stocks range from monthly paying REITs to traditionally stable blue-chip stocks. Once an investor decides to begin investing in income stocks, they must understand several ratios, such as dividend yield and yield on cost. These ratios can help investors analyze stocks they are considering buying or selling.

Do you invest in dividend-paying stocks? What experiences can you share – good or bad?