How to Invest in Dividend Stocks

Looking for a smart way to invest your money? Well, you might want to consider dividend stocks. These types of stocks have been known to outperform the S&P 500 with less volatility. What makes them a great investment is that they offer not just regular income from dividend payments, but also potential capital appreciation of the stock price. This combination of returns can definitely boost your portfolio over time.

But don’t get too comfortable just yet.  Even though dividend stocks may seem safer, they have their own risks if you’re not careful. That’s why it’s crucial to learn the ropes of investing in dividend stocks before diving in. So, let’s explore how you can invest in dividend stocks and boost your chances of financial success.

What are dividend stocks?

Dividend stocks have become a popular investment choice for people seeking a reliable source of income. These stocks come from companies that regularly share a part of their profits with their investors. 

In the US, most dividend stocks provide a set payment every three months, and top-performing companies often increase these payments over time. This allows investors to create a steady cash flow, much like an annuity.

Not only do dividend stocks offer a consistent income, but they also bring stability to an investor’s portfolio. Generally, dividend-paying companies are well-established with a history of making profits. This means investors can count on receiving regular payments, even when the stock price goes up and down.

Dividend stocks vs. dividend funds

If you’re considering investing in dividend-paying companies, you have two main options: buying individual dividend stocks or investing in dividend funds like index funds or exchange-traded funds (ETFs). The right choice for you will depend on your investment goals, risk tolerance, and personal preferences.

Dividend funds offer a convenient way to diversify your investments, as they consist of a portfolio of dividend-paying stocks bundled into a single investment. By investing in a dividend fund, you can own a variety of dividend stocks through just one transaction and still enjoy a regular stream of income from dividends. 

This diversification means that even if one stock within the fund reduces or stops its dividend payments, you can still rely on income from the other stocks in the fund. Additionally, dividend funds typically have lower expenses than actively managed funds, making them a more cost-effective choice.

In contrast, investing in individual dividend stocks requires more research and analysis to ensure the stocks you choose complement your overall portfolio. While this approach demands more effort, it can lead to higher yields compared to dividend funds. 

Selecting individual stocks also allows you to tailor your portfolio to your specific investment goals and risk tolerance. Moreover, you have greater control over your investment decisions, which can be particularly advantageous during times of market volatility.

Regardless of whether you choose dividend funds or individual stocks, it’s crucial to remember the power of reinvesting dividends to boost your returns. Historically, dividends have contributed to the total annual return of the S&P 500 by an average of two percentage points. By reinvesting your dividends, you can compound your returns over time, maximizing the growth potential of your investment.

How to invest in dividend stocks

Investors often find it worthwhile to build a portfolio of individual dividend stocks, even though it requires time and effort. Here are the steps to buy a dividend stock:

Step 1: Screening 

The first step in investing in dividend stocks is to identify potential investments. Many financial websites and online brokers offer tools for screening stocks that pay dividends. We have included a list of high-dividend stocks below for your consideration. 

With these tools at your disposal, you can put together a list of stocks that fit your investment goals and give you sweet dividend returns.

Step 2: Perform a comprehensive analysis

Once you find potential high-dividend stocks, it’s essential to analyze them thoroughly to protect your investment. First, compare the dividend yields of similar companies. If a stock’s yield is much higher than its peers, it could be a warning sign and requires further investigation.

Then, look at the stock’s payout ratio, which shows the percentage of a company’s income used for dividends. A high payout ratio (typically over 80%) can be worrisome as it may mean the company is using a significant portion of its income or even going into debt to keep paying dividends.

Step 3: Diversify your portfolio

To invest in individual stocks, including dividend stocks, you need diversification. It means deciding how much of your portfolio to put into each stock. For instance, if you plan to buy 20 stocks, you could divide your portfolio into 5% for each. But, if a stock is riskier, it’s better to invest less in that and put more in safer options.

When reinvesting dividends, remember to recalculate your cost basis—the amount originally paid for the stock. This is crucial for tax purposes and tracking your investment performance.

Important Considerations

The primary concern when investing in dividend stocks is the safety of the dividend. Yields over 4% should be carefully examined, while those over 10% are considered especially risky. An excessively high dividend yield may indicate an unsustainable payout or declining share prices.

Moreover, be aware of the tax implications of dividend stocks. Dividends in taxable brokerage accounts are taxed in the year they are received, unlike non-dividend stocks, which are primarily taxed upon sale. For high-income investors with taxable accounts, dividend stocks may not be as tax-efficient as other investment options.

Top 10 Dividend Stocks

All dividend and yield information is as of March 13, 2023.

1. Pioneer Natural Resources (PXD)

Pioneer Natural Resources, an oil and gas exploration firm, boasts one of the highest dividend yields in the S&P 500 at 13.5%. Its variable dividend depends on the company’s performance.

2. Devon Energy (DVN)

With a 6.7% dividend yield, Devon Energy is an oil and natural gas producer that aims to provide competitive shareholder returns. It has a range of properties in the U.S.

3. Dow Inc. (DOW)

Dow, a Michigan-based chemical producer, serves various industries with a 5.1% dividend yield.

4. International Business Machines (IBM)

IBM, a top tech company, has paid dividends for over 100 years. It currently has a 5.2% dividend yield.

5. Verizon Communications (VZ)

Verizon, a communication and technology giant, generated over $135 billion in revenue in 2022. It currently offers a 7.1% dividend yield.

6. AT&T (T)

AT&T, another telecom leader, is focusing on 5G investments and debt reduction. It currently has a 6.1% dividend yield after a recent dividend cut.

7. Prudential Financial (PRU)

Prudential Financial, with nearly $1.4 trillion in assets under management, offers life insurance, annuities, and retirement services. It has a 5.5% dividend yield.

8. Philip Morris International (PM)

Philip Morris, which sells cigarettes and smoke-free products in over 180 countries, is shifting toward less harmful smoke-free products. It currently has a 5.1% dividend yield.

9. Walgreens Boots Alliance (WBA)

Walgreens Boots Alliance operates retail pharmacies worldwide and administered 35 million COVID-19 vaccinations in 2022. Its dividend history dates back to 1989, and it currently has a 5.8% yield.

10. 3M Company (MMM)

3M, a manufacturer of diverse products, has consistently paid dividends for over 100 years. Its current dividend yield is 5.7%.


To wrap things up, putting your money into dividend stocks or funds can give you some extra cash. Just remember to think about taxes and look into your options before you decide.

Although high dividends might catch your eye, make sure the company is in good shape and can keep paying those dividends for a long time. 

If you take your time and do your homework, dividend investing can be a great way to boost your investment portfolio.

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