How to Invest in Dividend Stocks: Passive Income Strategies for 2024

Dividend-paying stocks can be valuable sources of passive income but investors must still do their research before committing any money.

The companies that make regular pay-outs to shareholders are often large, well-established businesses with leading positions in their sectors.

But there are certainly no guarantees. Falling revenues, economic uncertainty, and the decision to invest in the business can affect dividend levels – or cause them to be scrapped completely.

Here we explain how to invest in dividend stocks, reveal which have recently been the best dividend stocks, and highlight potential risks to consider.

Key Takeaways

  • Dividend stocks are companies that look to share a percentage of the annual profits with investors. They may also make special, one-off cases, such as after selling a division.
  • The management teams decide if dividends will be made, how much is paid out, and when this will occur. These decisions are then ratified by shareholders at the annual meeting.
  • Dividend-paying companies are normally large, well-established, and stable businesses with reliable revenue streams.
  • Some companies have paid dividends for more than 25 consecutive years. This suggests they have sound financial discipline.
  • Dividends affect the share price in different ways. For example, it shows that the management is optimistic. This can attract investors and lead to rises in the share price.

What Are Dividend Stocks and How Do They Work?

Dividend stocks are publicly traded companies that make payments to investors out of their profits. Their management teams will decide how much to pay – if anything at all – and how often.

Buying into such companies can provide two sources of return. The first is a (hopefully) regular income from dividend payments and the second is capital appreciation of the stock price.

Stocks with a long history of paying regular dividends to their investors are usually well-established, stable businesses with reliable revenue streams.

This means they’re seen as less volatile, making them attractive for those wanting lower-risk investments, such as someone approaching retirement.

As a result, income investors are naturally drawn to dividend-paying companies, but it’s worth pointing out that these payouts aren’t guaranteed.

While a company may have every intention of paying a set amount, changes in their plans or the economic backdrop can cause the dividend level to be reduced – or axed completely.

It’s also worth pointing out that dividend-paying businesses may not be prioritizing growth, which can adversely affect the stock price’s chances or rising in the future.

How to Invest in Dividend Stocks?

So, what is the best way to invest in dividend stocks? Generally, you will need to scour the market for companies in stable, highly cash-generative sectors that aren’t looking to grow rapidly.

These types of businesses, which are usually in areas that remain broadly unaffected by global issues or increases in the cost of living, generally pay the most in dividends.

Mining companies, tobacco giants, and energy businesses often fall into this category as there is a continuous strong demand for their goods and services worldwide.

Investors looking at how to invest in dividend stocks for passive income will need to set up an account with a brokerage.

They can use this broker to place stock orders once they’ve decided which stocks they favor and how many shares they want to buy.

Types of Dividend Investments

There are three main types of dividend investments to consider when you’re deciding where to invest money.

3 Types of Dividend Investments

Individual Stocks

The first option is buying individual stocks. This involves determining which companies are the most likely to pay regular dividends.

The good news is there are plenty of stocks that pay dividends. In fact, many have been sharing out their profits every year for years.

There are even some that have increased dividends annually for the last 25 years. The S&P 500® Dividend Aristocrats® index measures the performance of these stocks.

However, there are no guarantees that a company will pay an annual dividend as this decision will rest with the company’s management team – and ratified at a shareholders’ meeting.

When searching for the best dividend stocks to invest in, it’s worth looking at a company’s balance sheet, stated objectives, and recent financial results.

This will give you an idea of the likelihood of it making future dividend payments and whether it’s anticipating economic headwinds over the coming year.

High-Yield Mutual Funds and ETFs

If you don’t fancy researching individual stocks, you could consider buying into a mutual fund or exchange-traded fund. This will give you exposure to a number of such companies.

The benefit is not having to do your own stock selection as responsibility for choosing top dividend stocks will be down to either a fund manager or the process of the investment house.

High dividend yield funds, for example, may focus on buying large and medium-sized stocks paying higher-than-average dividends.

Meanwhile, a dividend exchange-traded fund will invest in a basket of high-dividend stocks based on an index.

The ETF will be a passively managed product, meaning the fund manager will follow an index instead of making their own investment calls.

However, investors must still carry out their own research on high dividend yield funds and exchange-traded funds to ensure their objectives are aligned.

Dividend-Appreciation Funds and ETFs

Dividend-appreciation – or dividend growth – funds will generally invest in companies with the proven ability to grow their payouts over time.

These portfolios often favor stocks with “greater profitability and strong competitive advantages” as this can translate into strong performances in volatile periods, according to Morningstar.

“Dividend growth funds typically underperform the market during periods of exceptionally strong growth, when expensive stocks that pay little, if any, dividends fuel the market’s rise,” it stated.

There will also be dividend growth exchange-traded funds available, which will focus on baskets of companies with a history of consistently growing dividends.

Dividend stock investing strategies

Different strategies are adopted by investors looking at how to invest in dividend stocks. Here we look at two of the most popular: dividend yield and dividend growth.

2 Most Popular Dividend Stock Investing Strategies

Dividend Yield

This is the most popular way of assessing dividend stocks. It’s a financial ratio that expresses a company’s annual payments to shareholders as a percentage of its current share price. It enables investors to gauge a stock’s potential income return.

For example, if a company’s stock is trading at $100 and it’s paying an annual dividend of $2 per share, its dividend yield would be 2%.

Compare these numbers with a stock trading at $200 but paying $3 per share to investors. In this example, the dividend yield is lower at 1.5%, although investors actually receive more.

While you’d expect companies of similar size operating in the same sectors to offer much the same level of dividends as one another, there may be differences.

For example, a high dividend yield can be a positive or negative. It all depends on why. One may have a higher yield simply because its share price is in freefall.

Broadly, dividend yields between 2% and 6% are considered healthy. Higher yields are often symptomatic of issues that warrant further examination.

Dividend Growth

This strategy involves picking companies with long track records of growing their dividends. The focus is more on consistency rather than the amounts paid.

The argument in favor of a dividend growth strategy is that businesses that can constantly increase payouts have demonstrated financial strength and discipline.

Longer-term investors can also consider the benefit of buying into growing companies that will gradually increase the level of dividends paid. The more stock held, of course, means the more future dividends they will receive.

Stocks with a history of dividend growth may provide a compelling investment opportunity in uncertain environments, according to S&P Global.

“An allocation to companies that have sustainable and growing dividends may provide exposure to high-quality stocks and greater income over time, therefore buffering against market volatility and addressing the risk of rising rates to some extent,” it stated.

You will need to examine the dividend history of a particular company to decide whether it fits a growth strategy – and see if there are periods when dividends haven’t been paid.

It’s also worth remembering that even though a company boasts many years of making dividend payments to investors, such events are not set in stone.

The management teams may decide to hold cash back, rather than distribute it this way if they are concerned about the economic outlook or plan to expand the business.

Top 10 High-Dividend Stocks

So, what have been the best-paying dividend stocks and sectors in recent months?

Global dividends came in at $421.9bn on a headline basis in the third quarter of 2023, according to Janus Henderson’s Global Dividend Index.

The report put underlying growth at 0.3% after adjusting the figures for lower special dividends and a strengthening US dollar.

However, an impressive 89% of companies either raised dividends or held them steady over that three-month period.

The banking sector contributed most to growth in the quarter, adding $5.8bn, while utilities, boosted by Cez in Czechia, also made a significant contribution.

On the downside, very large dividend cuts were made in the mining sector, with more than half of businesses in this area reducing payouts.

Here is a list of the world’s top 10 biggest dividend payers in the third quarter of 2023, according to a detailed analysis by Janus Henderson Investors and the companies’ dividend data from CompaniesMarketCap.

No. Company Name Ticker Symbol Total Dividend Payments The Sum of All Dividends (split-adjusted) Dividend Yield (TTM)
1 China Construction Bank Corp 601939.SS 17 $0.60 5.65%
2 PetroChina Co 601857.SS 32 $0.50 5.12%
3 China Mobile Limited 0941.HK 43 $7.27 10.64%
4 BHP Group Limited BHP 72 $39.72 2.61%
5 Microsoft Corporation MSFT 80 $27.34 0.70%
6 Evergreen Marine Corporation Ltd 2603.TW 14 $4.42 46.54%
7 Cnooc Ltd 0883.HK 40 $1.42 9.27%
8 MediaTek Inc 2454.TW 23 $12.88 7.87%
9 Apple Inc AAPL 81 $7.78 0.52%
10 Glencore GLCNF 10 $1.42 9.81%

Factors to Consider When Opening a Dividend Stock Account

You must carry out your research on the various stock accounts to find which is the most suitable when you’re considering how to buy dividend stocks.

Pay attention to the tools available. Some providers will enable you to embrace various strategies from your brokerage account.

Consider what qualities are most important to you. For example, educational resources will be particularly valuable if you invest for the first time.

However, platforms that offer more advanced strategies could be better for investors who have been trading in dividend stocks for many years.

Other factors to consider include minimum deposit requirements – individual providers may set different levels to each other – and the overall user experience.

For example, some brokers may not have such well-developed mobile apps as their rivals. This could be a make-or-break factor if you plan to trade regularly while out of the office.

The Bottom Line

Dividend stocks are definitely worth considering by any investor.

Aside from the attraction of paying an income – which can either be withdrawn or reinvested for the future – these businesses are generally well-run.

Companies with impressive track records of paying dividends to investors over many years have clearly demonstrated good financial discipline.

However, even a long track record of dividend payouts isn’t a guaranteed route to riches. There are no guarantees that they will continue this trend.

Therefore, it’s vital to carry out your own detailed research on either individual dividend stocks – or investment funds – before committing your money.

As always, never invest more than you can afford to lose.

FAQs

Where to invest money to get good returns?

Should I invest in dividend stocks?

What are the Dividend Aristocrats?

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How are dividends taxed?

Are dividend stocks the same as dividend funds?

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Rob Griffin

Rob worked on the business desks of the Yorkshire Post, The Guardian, Sunday Business, and Sunday Express before going freelance in 2002. Since then he has written regularly for national newspapers, consumer magazines, trade titles and websites. His work has appeared in titles such as the Mail on Sunday, Sunday Telegraph, Independent, Daily Express, Citywire, and FT Adviser.