Buying your first dividend stock can be scary. But it’s a necessary step if you want to grow your net worth and create passive income. As I often say on this blog, if you want to be financially free, you must learn how to invest. And dividend stocks are one of my personal favorites when it comes to investing.
I love dividend stocks so much because you can get started with very little money and, if done correctly, the risk is minimal. In return, you can get steady returns that outpace inflation and capitalize on compound interest.
This has a huge impact on your overall wealth in the long run, which I explain more in How Compound Interest and Passive Income Work Together to Create Wealth.
Since I don’t want you to miss out on one of the best investment vehicles in existence, I’ve put together a guide to help you get started. (And, by the way, the sooner you get started, the faster your net worth will grow!)
Step One: Open a Brokerage Account (If You Don’t Already Have One)
First, you’ll need a brokerage account if you don’t already have one. A brokerage account is like a bank account that allows you to purchase stock. You’ll deposit money into it and use that money to buy shares of a company that pays a dividend.
Investopedia.com created a list of best brokerage firms for beginners. They are:
- TD Ameritrade
- Charles Schwab
- Merrill Edge
You can open this account online or by calling the brokerage firm. In order to open a brokerage account, you’ll need some identifying information, such as your social security number and driver’s license. The firm will also want to know your employment status and may ask you about your net worth and investment goals.
You will then need to fund the account. You can do this via check, ETF (electronic funds transfer) from a linked checking or savings account, a wire transfer or by rolling over another asset into the account, such as a 401(k).
Just be sure to understand the brokerage firm’s minimum investment requirement. Some will require you to invest at least 5K just to open the account. But there are options that only require a nominal investment, such as $500. You can also use the Robin Hood app, which has no minimum requirement.
You’ll also need to decide if you’re opening your account as an IRA (individual retirement account) or as a regular, taxable account. If you’re not sure which one you should do, do some research online or consult a CPA.
Step Two: Understand Date Terminology
Before you can choose your first dividend stock, you will need to understand some basic investor’s terminology. It may not be exciting to learn these terms but, if you like the idea of kicking your feet up while someone virtually hands you money, I highly recommend it.
Five of these terms have to do with dates:
This refers to the date you purchase the stock—although you don’t quite own the stock yet. This happens when the stock settles, which is explained in the next term.
This date is similar to the closing date of a real estate transaction. It’s the day the purchase becomes finalized and you become a shareholder on the company’s books. The settlement date occurs three business days after the trade date.
For example, if you purchase a stock on Tuesday, it will officially become yours on Friday.
This is the cut-off date in which you must own shares of a particular stock in order to receive a dividend payment from it. For example, if the ex-dividend date is October 15 then you must purchase shares in that stock before October 15 in order to receive the upcoming dividend.
If you purchase shares on or after this date, you won’t receive anything from the next dividend payment. You will, however, receive a dividend payment the next time around—and every time thereafter—as long as you continue to hold onto the shares of the stock.
Two business days after the ex-dividend date, the company records who bought shares before the ex-dividend date. These are the people who will receive a dividend payment from them.
This is the day you get to do a little victory dance—that is, the day the dividend payment goes into your brokerage account. I call this “free” money and it’s given to you simply for hanging onto the shares.
Step Three: Understand A Few Stock Terms
Just two more boring terms to understand and you can be on your way to earning passive income with little work. Grab a cup a coffee to keep you awake and read on:
This ratio is the stock’s dividend represented as a percentage of its earnings—basically how much you’re going to get back from what the company has earned. Some stocks actually pay greater than 100% back to their shareholders but this can be a bad thing because companies need to have money left over to invest in growth.
If that doesn’t make a lot of sense to you, just go with a recommendation by Dividend.com, which is a payout ratio of 55% to 75%.
Forward Dividend Yield
This is the projected percentage you’ll earn based on the declared dividend amount and price per share of that company. To me, this is one of the most important numbers to look at when choosing a stock. I personally look for percentages between 3.3% and 7%.
All stocks trade under something called a ticker symbol, which is just an abbreviation of the company’s name to uniquely identify it on the stock market. For example, Walgreens Boots Alliance’s ticker symbol is WBA. Verizon’s is VZ. Coca Cola’s is KO.
When you trade stocks through your brokerage, you will have to enter the company’s ticker symbol in order to trade it. It’s easy to find a company’s ticker symbol. Just type “company name ticker symbol” into your search bar or “company name stock” to bring it up. (For example, “Wells Fargo ticker symbol” will give you the result WFC.)
This is an order type that means you want to buy a stock immediately regardless of price. Your brokerage firm will buy the shares of stock for you at whatever price the stock is trading at when the order is executed.
Step Four: Choose Your First Stock to Buy
As soon as you finish this article, I highly recommend reading my article Why Everyone Should Own Dividend Stocks (A Simple Guide). I walk you through my process of choosing a good dividend-paying stock and explain it in a simple way—no financial degree required.
Some key points I cover in the article are:
- how to find stable companies that pay a healthy dividend
- the importance of the forward dividend yield
- finding the forward dividend yield for a particular stock
- why I look for stocks that pay a yield between 3.3% and 7%
- how to find a stock’s current trade price
- how to use analyst’s opinions to your advantage and where to easily find them
- a list of some of my favorite dividend-paying stocks
I choose stable companies that have been around for a long time and aren’t going anywhere—companies like Verizon, Altria, Universal Corp, Wells Fargo, Walgreens and more.
And if you buy shares of these companies when their average price is down, you can make even more money when the stock price goes back up (which I also discuss in my beginner’s guide).
Step Five: Buying Stock Through Your Broker
Once you’re ready to buy your first dividend stock, you can log into your brokerage account and purchase shares. Each brokerage will have its own dialog box for entering the information but they will all share some basic required features, such as:
- the transaction type (in this case, stock)
- ticker symbol
- action (buy)
- order type
I’ve included a screenshot from a brokerage firm and used Glaxo Smith Kline (GSK) as an example. If I hit the buy button in this scenario, I would be purchasing 2 shares at the current price of $43.97, which would cost me roughly $87.94.
I say “roughly” because of two factors: The slight delay that happens when placing a market order and the commission fee that your brokerage may charge you.
Most of the time, I just use market orders, which means the order will be filled at the current price when my broker buys my shares for me. Back in the old days (as in, before computers) this could take awhile and the stock price could change quite a bit from the time the person put in their request to buy and the broker executed the order.
These days, however, a market order happens almost instantaneously when you put the order in online. In other words, when purchasing stock from as stable company like Glaxo Smith Kline, Pepsico etc, you don’t have to worry about huge swings in the stock price.
Therefore, I feel comfortable choosing a market order (as opposed to something called a limit order) when buying stock because there will be little change in the stock price between the time I place the order and when the order is executed.
Look For Commission-Free Brokerage Firms
A commission fee is something some brokerage firms charge when you buy or sell a stock. Some brokerage firms started waiving their fees in response to competition from competitors, such as the Robinhood app, which has never charged a fee.
Check with a brokerage firm regarding their fees before opening and using your account. Obviously, finding a firm that doesn’t charge a fee is the way to go. (TD Ameritrade and Fidelity are two that currently have zero trade fees for online transactions.)
Diversify To Minimize Risk
One thing I should mention is that I never put a large share of my money into one company—and most seasoned stock traders out there will tell you the same thing. Even if it is a stable company and it pays a nice dividend, I never invest more than 5% of the total value of my portfolio into one company.
This helps to minimize risk because, if that one company’s stock price should drop dramatically (unlikely but still theoretically possible) then I will still be up overall. This is a way to minimize risk and it’s the same reason why many financial experts recommend mutual funds.
Stable Companies Mean Big Returns
Investing in dividend-paying stocks can forever change your financial situation for the better. Even just knowing the basics can give you much higher returns than investing in real estate or buying stocks merely for growth.
Choosing and purchasing which dividend stock to buy doesn’t have to be complicated. All of the jargon and charts out there are made for people in the industry—people who trade stocks for a living. You don’t have to understand all of it to capitalize on it so don’t worry if you don’t understand all of the terms or regularly follow the markets.
Just start with the terms here, read the beginner’s guide that I’ve laid out and you’ll be well on your way. Also, don’t feel bad if you make a few mistakes along the way. I’ve made the mistake of hanging onto stocks for too long or not buying when I should have. No one—not even the “experts”—gets it right 100% of the time.
But the beauty of investing in stable companies that pay a decent dividend is that it’s almost always a good investment. Investopedia.com has this to say about it, “Typically, companies that have consistently paid dividends are some of the most stable companies over the past several decades.”
It’s my hope that you will get started in dividend investing and the sooner you do so, the faster you’ll increase your net worth. Hopefully, you’ll get a taste of what it’s like to cash in for doing absolutely nothing after buying your first dividend-paying stock and want to buy more.