Dividend Investing: Investing In Dividend Stocks

What do you think is the best way to invest in the stock market? Trend trading? Swing trading? Day trading? Long-term investing? Value stocks? Growth stocks? Penny Stocks? Definitely not the latter. That’s a good way to go broke in a short period of time.

Most penny stocks aren’t even representing real companies; they are representing shell companies. Think of them as pyramid scheme – where you donate your money to those at the top of the pyramid. A good rule of thumb is to never invest in a stock priced at less than $5.

That’s a good way to stay out of trouble. As far as all the other options listed above go, they have potential. You need to know what you’re doing, though. That’s even the case for long-term investing. Buy and hold is not as successful a strategy anymore. We are no longer living in the days of endless credit and purchasing power. Therefore, the stock market will not be in bull mode 80% of the time. If you want to invest in stocks, you need to pay attention to what is going on and have an exit strategy for all your positions.

A good way to do this is by setting a trailing stop on your positions. This will allow you to avoid worry if bad news comes out. Your stock will automatically be sold for you. Trailing stops are available on almost every trading platform, such as Ameritrade or E-Trade. The only way you will get hurt is if there is a gap down, which means the news was so unexpected that it dropped the stock price so fast that it never stopped at your sell point. Sounds scary, doesn’t it? It is. But there is a way that you can greatly reduce your risk and slowly build your wealth in the stock market. It’s called dividend investing.

Before we go over how dividend investing works, we first have to understand what a dividend is. A dividend is a guaranteed payment to a shareholder regardless if the stock price goes up or down. In most cases, this payment is made quarterly. In a few rare cases, it will be made on an annual basis.

Either way, the percentage of a dividend payment is often referred to on an annual basis. For example, if Exxon Mobil pays a 2.5% dividend, this means you will be paid 2.5% per year, not per quarter. Since dividends are often paid quarterly, this can get confusing, but you will get used to it fast.

The reason dividend investing is so successful is because companies that are paying dividends are in good financial health. Any company that is on the ropes or sees trouble on the horizon is not going to pay a dividend to their shareholders. And if they have one, they’re going to cut it. By sticking with solid companies, you’re already ahead of the game.

Even if the economy falters, these are much bigger ships to turn, which means they will not get hammered. In order to take full advantage of these solid companies and use dividend investing as a wealth-building strategy, every time you earn a dividend payment, reinvest it into the stock. This will not only buy you more shares, but it will increase your dividend payment next time.

For example, if you own 1,000 shares of Exxon Mobil (oil and natural gas stocks are in a great market) and it is trading at $70 per share, a 2.5% annual dividend will pay you $1,750. Take that $1,750 and buy 25 more shares of XOM. As the years go on, you will watch your money grow and grow. It is best to diversify with this strategy. Spread your money out amongst three to four dividend-paying companies. Energy companies, and natural gas stocks are almost aways a great call.