You’ve got to start your dividend investing career somewhere. An attainable starting point for many new investors is one thousand dollars. 

$1000 is a nice round number. If you’re from the UK then £1000 also works. It should be enough money to start a portfolio but a smaller amount than you one day hope to have invested.

Investing with small amounts presents some challenges, which we aim to help you overcome.


Big ideas

Before you even think about which stocks to add to your portfolio, you have to think about your goals. One important consideration is income vs wealth-building.

Investing in fractional shares gives you access to high-priced stocks in a small portfolio because it allows you to buy less than one share of a company.

Diversification can be achieved by selecting stocks from each of the 11 major sectors as well as by using ETFs.

What is a dividend portfolio?

A dividend portfolio is a collection of dividend-paying stocks that altogether aim to be well-diversified and give you the best chance of earning a consistent income. It’s fine to own stocks for other reasons but they just won’t be involved when making a dividend portfolio.

Watch our video

How to start a dividend portfolio

Having such a portfolio allows you to earn some passive income and generate wealth for the long term. You can adjust your dividend portfolio strategy to suit your own purposes.

Do you want a regular monthly income? You can do that by owning a portfolio of stocks that have payment dates every month. 

For example, with 12 stocks in your portfolio, you can make sure each stock pays its dividend in a different month. With 52 stocks in the portfolio, you can get paid weekly.

You can build a diversified portfolio effortlessly when [trading in the UK](https://www.trading212.com/trading-instruments/invest) and Europe with Pies, and automate your investments with Autoinvest. You can also enjoy the peace of mind that comes with 24/7 support, ensuring you receive assistance whenever you need it.

You can take this a step further by changing the weighting of each stock within your portfolio to make sure your monthly payouts are the same.

Say you invest in 3 stocks: 
     
- Stock A pays a dividend of $20 in February
- Stock B pays $30 in March 
- Stock C pays $40 in April

To even out the monthly income, you can buy more of stock A and less of stock C.


Instead of using the cash for income, you can reinvest to increase the value of your portfolio and grow your wealth over time. When focusing on long-term growth, you can attach more importance to the **size** of payments. When focusing on income, you can focus more on the **timing** of the payments.

How to build a good dividend portfolio with $1000

One of the first questions on your mind is likely: How many stocks should I have in my portfolio?

The best answer is **KISS** - keep it simple stupid!

Starting a dividend portfolio with $1000 can be done with 10 stocks with an average of $100 invested in each. You might think it is not enough, but you can have a lot of variety in the size of the company and risk profile among 10 stocks. Also, there are 11 major sectors, so it means you come close to covering all corners of the stock market.

You only need to look at Warren Buffett’s Berkshire Hathaway to see that the top 10 stocks make up the bulk of the money invested.

Berkshire Hathaway's biggest investments

Keep in mind that $1000 is just your starting point. Adding to your portfolio with deposits and dividend reinvestments over time is a prerequisite for building long-term wealth. For [commission-free investing in the UK](https://www.trading212.com/trading-instruments/invest), Europe and around the world, simply apply the sample principal but with a starting point of £1000.

An allocation of $100 per stock for the portfolio sounds simple enough, but what if one or more of the stocks you want to buy is priced over $100?


Using fractional shares for a small portfolio

Buying a suitable cross-section of large well-known stocks is a challenge for any beginner dividend portfolio. You might wish to [invest in Apple shares](https://www.trading212.com/trading-instruments/invest), but how do you know which other stocks could fit alongside it and stay diversified?

Take Warren Buffet’s Berkshire Hathaway as an extreme example - at the time of writing, the stock price just ticked over $500,000. Just one of those shares, let alone nine others are too pricey for a beginner’s portfolio. Thanks to fractional shares, this is no longer a problem.

A fractional share is less than one whole share. Owning fractional shares allows you to buy less than one share of a company. Let’s say you have £10 to invest. How can you [invest in Apple stock from the UK](https://www.trading212.com/trading-instruments/invest/AAPL.US) when each share is worth about $100? You can buy 0.1 ( a 1/10th fraction) of a share for $10 (which is worth a bit under £10). 

To illustrate how fractional stocks can work for our theoretical $1000 portfolio, here's an example of five well-known stocks, including Apple (AAPL), for those thinking about an [investment in Apple from the UK](https://www.trading212.com/trading-instruments/invest/AAPL.US).

Apple - 1 Share = $165
Microsoft - 1 Share = $279
Visa - 1 Share = $211
McDonald’s - 1 Share = $252
Johnson & Johnson - 1 share = $181

Buying a single share of these 5 companies would cost $1088. By using fractional shares, you can reduce that to less than $500, leaving room for the next five shares in the 10-stock portfolio.

AAPL - 0.6 Shares = $99
MSFT - 0.2 Shares = $83.70
V -  Shares = $105.50
MCD - 0.4 Shares = $100.80
JNJ - 0.5 shares = $90.50

Using fractional shares, the cost of this portfolio is now $479.50.

Using fractional shares, the cost of this portfolio is now $479.50. It has become possible to [invest in Apple shares](https://www.trading212.com/trading-instruments/invest/AAPL.US) as well as these other big international companies listed on the New York Stock Exchange and Nasdaq, all for under $1000.

With the Trading 212 app, it is even easier than that. Instead of selecting the number of shares, you can just select the amount you want to invest, and the app automatically calculates how many fractions of shares that will be. With this approach, [commission-free investing](https://www.trading212.com/trading-instruments/invest) can be done from the UK when buying big stocks of big American companies.

Fractional shares help you to fit your desired portfolio within your budget and let you invest in more companies over a diverse range of countries, industries and [trading instruments](https://www.trading212.com/trading-instruments/invest). 

How To Balance Your Dividend Portfolio

Balance is important when investing. Making sure that your portfolio isn’t overly reliant on one particular stock or industry will make your portfolio durable.

Sectors

Spreading your risk over multiple sectors of the economy will ensure industry risk is reduced. This is a list of the 11 major economic sectors:

Finding one company in each industry is the ideal way to protect a portfolio against adverse economic conditions. The logic is that when one sector may be struggling, another might be thriving.

Dividend yield

A simple way to diversify risk is to choose stocks with different size dividend yields. Yield correlates well to risk. That is because riskier companies generally have to offer higher yields to compensate investors for the higher risk than investing in ‘safer’ companies.

Flooding your portfolio with high-yield stocks means flooding it with risk. On the flip side, a portfolio of very low-yield stocks is going to have less-than-impressive returns. 

One strategy is to have a base of lower yield stocks for safety, with a small allocation to some higher yield stocks for higher potential returns. Using the Trading 212 app, you can select the weight of each stock in your European or [UK trading account](https://www.trading212.com/trading-instruments/invest) by using Pies (more on this below).

Creating a dividend portfolio with ETFs

One way to supercharge the diversification of your beginner dividend portfolio is by adding an index ETF or an index fund.

An exchange-traded fund (ETF) is a basket of stocks that trade on an exchange just as if it were a single stock. It’s a great way of investing in many different stocks at once with built-in diversification.

If you are mostly investing in American companies, you might opt for an ETF based on the S&P 500. If you’re investing in the UK it might be the FTSE 100, or in Europe the Euro Stoxx 600.

How to grow a dividend portfolio with Trading 212

To help your portfolio grow, you can reinvest the dividends received, giving you more stock from which to earn higher future payouts. As an example, there is a way to [invest in Apple shares in the UK](https://www.trading212.com/trading-instruments/invest/AAPL.US) through the Trading 212 app, and reinvest dividends automatically even if your account is denominated in British pounds. This can be done using [Pies and Autoinvest](https://www.trading212.com/auto-invest). You can buy AAPL stock as a percentage weighting in a Pie and automatically add funds to the Pie every month. Regular deposits into your portfolio are paramount, especially if you are investing for the long term. For your $1000 portfolio, adding $100 per month would be a great start if possible.

Recap

There are a few different ways that you can start a dividend portfolio. One way is to invest in 10 different stocks, which can be a mix of large and small companies. Another way is to invest in a balanced mix of stocks and ETFs. And yet another way is to invest in fractional shares of stocks.

No matter which method you choose, the important thing is to start investing in a way that best suits your needs and goals.

Dividend Portfolio: What is Dividend Portfolio? Using fractional shares for a small portfolio. Learn how to create a strategy and grow your portfolio at Trading212!

Dividend Portfolio: What is & How to Create Your Dividend Portfolio

How to create a dividend portfolio?

Investing in stocks to earn a return through dividends can be an excellent way to generate passive income and build wealth - and it requires relatively little upkeep.

Characteristics of a good dividend stock

You need to get familiar with the important characteristics that make a good dividend-paying stock. This is the kind of stock that you’d want to keep in your portfolio year after year. Specifically, these characteristics fit into two camps:

**Qualitative** - Looking at the business itself and what it does

**Quantitative** - Analysing the numbers

The qualitative features of a company are what it does, the industry it is in, how long it has existed etc. We give the example of Warren Buffett’s favourite [Coca-Cola](https://www.trading212.com/trading-instruments/isa/KO.US).

Quantitative measures such as the price-to-earnings ratio are formulas used to judge the size and health of a dividend.

Qualitative characteristics

The tactic of the stock brokers led by Leonardo Di Caprio in the Wolf of Wall Street was to first offer their clients a blue-chip stock to gain their trust before flipping them into pink sheets and penny stocks that earn very high commissions.

The first qualitative characteristic you should look for is that the company should not be the kind of “exciting opportunity” that stockbrokers would call you about! The company must be stable. If investors make money in exciting companies, it will be through the growth in the share price - not through dividends.

With a good dividend stock portfolio, you shouldn’t need to be constantly following the market with sophisticated techniques. You are a long-term passive shareholder directly benefiting from the profitability of a company. Dividend investors are generally looking to avoid risk and excessive stock price fluctuations so that they can comfortably grow their portfolio incrementally over time.

Understanding a company's stability and the industries, it operates in doesn’t have to take forever. A combination of research and common sense is needed. You need to get to know the company and what it does and decide whether it is a business that has good long-term prospects.

Warren Buffett’s stock with a good dividend

Warren Buffett has held shares of Coca-Cola since the late 1980s; the company accounts for about 8.5% of Berkshire Hathaway's portfolio at the time of writing.

79,000 employees - this is a huge company. 

It’s in the consumer / non-cyclical sector - which is generally seen as defensive in a portfolio.

It’s in the beverage industry - which is a stable industry to be in, although not all beverage companies are stable.

Owns major brands, Coca-Cola obviously, Sprite, Fanta but also Costa coffee, Vitamin Water, Minute Maid etc. 

To further your knowledge of a company, you can join the quarterly conference call that management holds after releasing quarterly earnings. Here you can hear the management discuss the company and hear analysts asking about what they think is currently important for the business.

It really doesn’t need to take more than a few hours to investigate a potentially good dividend stock to buy, which you might end up being invested in for years - even decades!

Quantitative characteristics

Here are 5 quantitative techniques to help decide what is a good dividend stock.


**1. Dividend yield**

This is probably the most basic technique for filtering your stock choices. The dividend yield is how much return in dividends you will get from your investment in a particular stock.

Dividend yield = (Dividend per share / Stock price) x 100

If the share price is $100, and it pays a dividend of $5 a year then the dividend yield is 5%.


When dividend investing, one of the things to be avoided is what is called a "dividend trap" stock. These stocks pay a high dividend and look like great investments if you’re only looking at the dividend yield. That high dividend acts like blinkers over people's eyes - they see the big returns and miss some big underlying issues with the company.

As a general rule, It's not advisable to apply a single criterion. Try to include various techniques and give yourself the best chance at filtering out the bad stocks.


**2. Dividend growth rate**

Stable companies are to be cherished but one thing that should not be stable is the dividend payout. The best scenario is when companies raise it gradually over time. That way the investor earns more and has a better chance of keeping pace with inflation.

A company's history of past dividend payments is publicly available information and can easily be found online.

Payout history of Coca-Cola

Past payouts are not a prediction of the future but a good dividend stock history does demonstrate that the company is capable of doing what you need it to do.


**3. Payout ratio**

Since investing is all about holding for the long term, you want to make sure the stock you choose can keep up its payments. One of the ways to do that is to check the payout ratio, which is what percentage of the company's profits are paid out in dividends.

Dividend payout ratio = Dividends paid / Net Income

A payout ratio in the 40-50% range means more than half of the company's profit is reinvested into growing the company.

Generally speaking, a lower payout ratio is more sustainable. It can also mean a lower dividend yield. This is a balance that you must strike when selecting your stocks.


**4. Debt-to-profit**

Another potential threat to the company’s stability is if it has a lot of debt. A company with too much debt may be forced to pay off debt instead of paying dividends.

Debt-to-profit = Total Debt / Annual Net Profit

The debt-to-profit ratio is often called "gearing". It can be seen in corporate reports expressed as debt-to-EBITDA. Generally, the lower the "gearing", the less risk the company carries. 

Sometimes raising money through debt makes sense if, for example, it means taking advantage of low interest rates or increasing production capacity. Having debt isn't necessarily a bad thing; what matters is being able to pay off the debt, and the debt is being used to grow.


**5. Price-earnings (P/E) ratio**

If there’s one ratio people tend to know about, it's the P/E ratio, and for a good reason. This is the ratio between the price of the stock and its earnings.

PE ratio = Share price / Earnings per share (EPS)

High P/E ratios (over 20) typically mean a stock is overvalued, while low P/E ratios (closer to 10) mean a stock is probably undervalued. 

Growth stocks tend to have high P/E ratios because they are not earning high profits. This is because the money earned is being reinvested to foster growth. Dividend investors are not looking for high-growth opportunities but rather companies with stable earnings.

When you’re planning to hold onto a stock for a long time, there’s no need to go bargain hunting, but you don’t want to buy a stock with a high valuation. By definition, the slower growth of a stable company does not justify a high P/E ratio, meaning the share price has a higher chance of falling below where you bought it.

There are a number of factors that can make a stock a good dividend stock. From a qualitative standpoint, the stock is typically a well-established company with a strong track record of profitability and a history of paying out regularly to shareholders. The company should also have a solid financial position, with a healthy balance sheet and consistent cash flow.

From a quantitative standpoint, a stock should have a high dividend yield (DY) and a low payout ratio. The DY is a measure of the annual payout as a percentage of the stock's current price, and the payout ratio is a measure of the company's dividend as a percentage of its earnings.

Good Dividend Stock - What makes a good dividend stock? Learn about main characteristics of a good dividend stock like: Yield, Growth Rate, Payout Ratio, P/E ratio.

Good Dividend Stock Characteristics: Dividend Growth, Payout Ratio

What makes a good dividend stock?

Dividend investing is a popular strategy for generating passive income and growing your wealth over time. But to maximize the potential returns from your dividend investments, it's important to understand the key dates in the dividend process. In this article, we'll explain the different dates you need to know about, and how they can impact your dividend income. We'll also provide some tips on how to track these dates and manage your investments accordingly. Whether you're a beginner or an experienced dividend investor, this article will provide valuable information to help you get the most out of your dividend investments.

There are 4 main dates to know about, but the most important are the ex-dividend date, which is the last day to qualify for the dividend and the payment date, when the money is paid out to you.

The dividend yield tells you what you can expect to earn per share, and the payout ratio indicates how sustainable those earnings might be.

How do stock dividends work?

Dividends are cash payments that a company will pay to its shareholders at regular intervals (usually quarterly). They are paid out of the company's earnings.

Dividends help companies attract investors and provide you, as an investor, with regular income. Reinvesting the payment received even allows you to purchase more stock in companies that you own for free!

The dates

Companies pay dividends regularly, most often quarterly, alongside earnings reports. Here are four important dates you should add to your calendar.


**1. Declaration date**

The declaration date is when the company announces it is paying its dividend to investors. 

On the declaration date, a declaration statement is released which includes the size of the dividend payment. It’s on this date that you learn how much you get paid!

The declaration date can be an important day for the share price because the size of the dividend is one way management expresses its confidence (or lack thereof) in the company's future performance.

If the company increases the size of its dividend, then that shows management is confident enough in future earnings growth to give more of it away to shareholders. If a firm cuts its dividend, it's often a bad omen. That doesn’t have to be the case, so you need to look at each situation on its own merit.

Some other things to be found in the declaration statement are:



**2. Ex-dividend date**

The ex-dividend date is the date by which you must own the stock to receive the next scheduled payment. In the City of London, you’ll hear about share prices falling because they went ‘Ex-Div.’

If you purchased a stock before the ex-dividend date, you are entitled to the next payment. Likewise, if you bought the stock on or after the ex-dividend date you are NOT eligible for this payment and the seller will keep it. 

That’s why the share price drops when it goes Ex-Div. The price is adjusting for the fact that the shares no longer include an entitlement to receive the coming dividend payment.


**3. Record date**

The record date (aka. date of record) is similar to the ex-dividend date. You must be on the company's books as a shareholder (i.e. there is a record of you owning the stock) by this date, in order to receive the dividend payment.

This is the date that the company will pay the dividend to its shareholders. The company will send you the money, and if you own the stock via Trading 212, there will be a popup in the app to show you received it, normally a day or two later.

Dividend investing formulas

Next are the important ratios to know when analysing which dividend stock to buy.


**1. Dividend yield**

The dividend yield of a stock is a company's total payments to shareholders for the year expressed as a percentage of its current stock price.

Dividend Yield = (Total Dividend / Stock Price) x 100

Using this formula, you can work out the dividend yield of a stock.

If company A trades at $120 and its dividend per share is $6 annually, to work out the dividend yield, the dividend yield calculation is as follows:

6 / 120 = 0.05
0.05 x 100 = 5
Dividend Yield = 5%


Dividend yields will change over time. If the company decides to increase its dividend, then the yield goes up, and vice versa. The dividend yield also moves with the share price. When the price of the stock drops, then the dividend yield goes up. Let’s go back to the same example to demonstrate. 

Company A’s shares are now trading at $100 instead of $120, but the payout is unchanged at $6.


6 / 100 = 0.06
0.06 x 100 = 6
Dividend yield = 6%


With the same payout in dollars ($6), company A has a dividend yield of 6% when the share price is $100, which is more than the dividend yield of 5% when the share price is $120.

The benefit of a high dividend yield is obvious, it means you are getting paid more per stock that you own. But there can be some drawbacks. 

If a company has a high dividend yield, it means it is choosing to give away its earnings to shareholders instead of investing them in R&D or expansion. Over time this will limit the company’s growth potential.

There is also another big caveat to a high dividend yield, it may not be sustainable. You don’t want to buy a stock for its great yield, only for management to cut the dividend to something more affordable.


**2. Dividend payment ratio**

Another way to think of a dividend is as a cost to the company offering it. If a company starts earning less income, the prudent thing for management to do is cut costs, one of which is the dividend. The problem is that management won’t always do the prudent thing right away.

This is where the dividend payment ratio (DPR) comes in. The DPR is the percentage of a company's earnings that it pays out to shareholders in dividends. Working out the DPR of a company allows you to see how sustainable the dividend payments are.

Payout Ratio = dividends per share (DPS) / earnings per share (EPS)

If company B has a DPS of $4 and an EPS of $2 then their payout ratio would be 50%.

Investors prefer lower DPRs because it means there is a lower risk that the dividend eventually gets cut and a better chance that it will consistently grow over time. In other words, the higher the payout ratio the less of a safety net there is for a company's earnings. One bad quarter could jeopardise the dividend.

Rule of thumb - invest when the payout ratio is below 50%. This shows that the company is reinvesting more of its profits than it is paying out, laying the groundwork for future earnings growth and dividend growth.

Example dividend stock investment

Here is an example of what happens when you own shares of Apple with Trading 212.

Before you invest, you want to see what the dividend yield is. This can be seen under the description of the company in the Trading 212 app.

Key ratios / Dividend yield

Once you own shares of Apple and receive a dividend payout, the app confirmation will include the ‘date received’ and the Ex-div date, typically a week before the payment date.

Dividend payment confirmation

The main dates to know are the declaration date, ex-div date, payment date, and record date. The declaration date is when the company announces the dividend, the ex-div date is when the stock goes ex-dividend, and the payment date is when the payment is made.

The dividend yield is a key metric for investors, as it indicates how much income they can expect to receive from their investment. The payout ratio is also important, as it tells investors how much of a company's earnings are being paid out in dividends.

How Dividends Work in the UK - Learn more on how Quarterly & Monthly, Stock, ETF and Mutual Fund Dividends work in the United Kingdom. Payment Ratio and Dividend yield.

How Dividends Work: Quarterly, Monthly, Stock, ETF Dividends in UK

How dividends work

How dividends work?

Dividend investing is a wealth-building strategy that all should at least consider – whether they are beginners or experienced investors.

Many companies payout dividends to distribute earnings to shareholders and encourage stock ownership.

Investors can use them for passive income and to grow wealth over the long term.

Dividend rates are per share and the dividend yield shows how much it is as a percentage of the share price.

What is a dividend?

A dividend is cash or sometimes shares that a company will pay to shareholders on a regular basis, just for owning the shares. Dividends exist so that companies can share profits among their owners. Investors can use them as a source of income or use the payout to buy more shares and increase the size of their investment.

What is a stock dividend?

A stock dividend is what a company will payout to shareholders who own the company’s stock.
A company will declare a dividend per share, so each share you own entitles you to a payout. 
What is a dividend on a stock? The size of your payout is proportional to how many shares you own.

A shareholder with 100 shares will get 100x the dividend of a shareholder with 1 share.

A dividend payment from Trading 212

Every investor wants the best app for dividend investing. You needn’t look any further than Trading 212.

The money received as a dividend is sent to your Trading 212 account without you having to do anything. You will have made money by literally doing nothing. You don’t even need to sell any of your stocks!

Goal of dividend investing

The goal when investing in dividend stocks is not to find the next rocket ship stock headed for the moon! There are two main objectives:

The one you’re more focused on will often depend greatly on your age. Older investors that have retired or are close to retirement can use dividends as a source of income to replace the income earned by working. Younger investors who are working and don’t rely on other sources of income can reinvest the dividends to grow their wealth before they retire.

These goals can both be achieved by investing in strong, reliable companies that raise the amount they payout to shareholders as dividends over time.

Using dividends to earn income

Dividends are usually paid straight into the cash balance in your brokerage account. You can withdraw the cash as a source of income or use it to buy more shares. The strategy of using dividends as income is known as income investing. The goal is for the cash you receive to supplement and eventually replace your salary once you retire.

Building wealth with dividends

Instead of using the dividend payout as an income, you can reinvest it to buy more shares. 

This creates a snowball effect - by owning more shares, you earn bigger dividends because they are paid per share, reinvesting those bigger payouts makes even bigger payouts. This process is known as compounding returns.

A comparison between the theoretical past earnings made when taking out the dividends versus reinvesting them can be seen in this chart of the S&P 500.

What’s really noticeable is how steeper the line gets. The line shows how much more you could make in later years because the impact of compounding grows over time. Like a snowball rolling down a hill.

Pros and cons of dividend investing

A good dividend stock investing strategy has many advantages and suits many types of investors, but there are some limitations, meaning it is not for everyone.

**Pros**

It is one of the simplest forms of passive income. If you compare buying a dividend stock to buying a rental property, there’s just no comparison in terms of simplicity.

You’re investing in larger, blue-chip companies, which generally have been in business for decades, making it one of the least risky forms of investing.

You can live off the income from your portfolio but it takes a lot of money and usually a lot of time to earn the money to do that.

Compounding returns means investing even a small amount of money could lead to big long-term gains.

Dividend payouts from top companies will tend to rise faster than general prices, offering you protection against inflation.

Not many ‘home runs’. The stock price of dividend-paying companies will often remain in the same price range for years. So again, this is not the way to go if you're after a quick buck.

If there is a downturn in the overall stock market, blue-chip stocks that pay dividends will usually go down less than the broader market, but they will most likely still go down, bringing your account balance down. Remember, any time you invest, your money is at risk.

Dividends aren’t guaranteed to stay the same. There is no obligation for a company to keep it, and when times are tough, companies will cut the dividend to save money and, in doing so, cut your source of passive income.

In dividend investing, there is a lot less ‘speculation’ than in other investments, like investing in growth stocks or day trading.

It’s critical to realise that this style of investing is not about trying to predict which way the stock price is going to go. The intention must be to find companies that are most likely to consistently payout to shareholders.

Where can I find dividend stocks?

A dividend stock is any stock you can purchase on public markets that pays out a regular dividend. There are different types, often categorised by how long the company has been paying out to shareholders. Companies that have paid out consistently for over 25 years are affectionately known as dividend aristocrats.

There’s nothing wrong with using pre-existing lists of the most popular stocks as a starting point. The best dividend investing books, such as Dividends don’t lie by Kelley Wright and Get Rich with Dividends by Marc Lichtenfeld, have many good suggestions. 

On the Trading 212 app, you can find such in the Dividend category. It’s nearly all household names. And that’s the point. In all likelihood, these companies aren’t going anywhere.

AT&T is a good example of the kind of longevity you want to see in a dividend-paying company. It was founded in 1885 by Alexander Graham Bell, the inventor of the telephone, and it is still in business today! There is always a possibility that AT&T could go out of business after 137 years in the year you decide to invest, but it’s unlikely.

When investing in a stock, it is especially important to get familiar with the company that you’re investing in. The better you know a company, the more confidence you’ll have to hold onto the stock and reap the long-term rewards as a shareholder.

What is a dividend rate?

The dividend rate is the amount of currency a company will pay you per share you own. For example, Apple’s dividend rate in 2022 was $0.23.

You own 10,000 shares of Apple (AAPL) that pays out £0.23 per share per year.
10,000 x £0.23 = £2,300

What is a dividend yield?

Dividend yield is the amount you’ll get paid per year (dividend rate) as a percentage of your investment. As a dividend investor, this is probably the first statistic you will check for any new investment.

That’s why it is listed under ‘Key ratios’ on the Trading 212 app.

Let’s say you bought $1000 of AT&T stock and the dividend yield is 8.70%, you’ll make $87.00 in dividend income for the year. If you invest $100,000 – you’ll earn $8,700 instead.

Wrap

There are two key goals behind dividend investing: building wealth and generating passive income.

The goal of building wealth is to grow your nest egg so that you can eventually retire comfortably. To do this, you need to reinvest your dividends to purchase more shares of stock, which will increase in value over time.

The goal of generating passive income is to create a stream of income that does not require active work on your part. To do this, you need to invest in dividend-paying stocks that will provide you with a consistent income stream.

It is important to remember that dividend payments are not guaranteed. While most companies have a long history of dividend payments, there is always the potential for a cut. This could lead to a significant decline in income, which could make dividend investing a risky strategy for some investors.

Getting Started with Dividend Investing: What is a dividend and stock dividend? Learn about goals, Pros and Cons of dividend investing. Build your wealth smart!

Dividend Investing Pros & Cons: Stock Dividend, Rate & Yield Explained

Getting started with dividend investing

Dividend reinvestment plans (DRIPS) are one of the most straightforward ways to accumulate long-term wealth - if you can stick with it for long enough. 

With a dividend reinvestment plan (DRIP), you can compound your wealth by automatically reinvesting the dividends from stocks back into the same company. 

Many of the world’s top companies ([Kellogs](https://www.trading212.com/trading-instruments/invest/K.US), [Johnson & Johnson](https://www.trading212.com/trading-instruments/invest/JNJ.US), [Exxon Mobil](https://www.trading212.com/trading-instruments/invest/XOM.US)) are known for offering dividend reinvestment plans as it makes them more attractive to serious investors. 

DRIPS are not a get-rich-quick scheme - but they are possibly the most reliable ways to build wealth if you can remain consistent. 

**“The stock market is a device for transferring money from the impatient to the patient." **

Dividend reinvestment plans are for investors that want to stick with a specific company (or portfolio of companies) for the long term. 

Here’s what you do: 

Instead of taking the dividend as a form of cash to spend or invest in another stock, you reinvest it back into the same company that paid it and receive more shares. 

A good way to think of a dividend reinvestment plan with a company is like a marriage. You won't see the benefits if you break up too soon or choose the wrong one. But if you choose your match carefully and keep working at it, you will reap the rewards!

As a place to get started, companies with at least a decade of rising dividend payouts are known as “dividend aristocrats” and are prime candidates for a long-term relationship

What is dividend reinvestment (DRIP Investing)?

A dividend reinvestment plan (DRIP) is a program offered by some publicly traded companies that allow shareholders to automatically reinvest their cash dividends into additional shares of the company's stock. Instead of receiving cash payments, shareholders can acquire more shares in the same company.

NOTE: Some companies pay stock dividends, in which case, a DRIP is surplus to requirements.

With a dividend reinvestment plan, eligible shareholders who participate will have their cash dividends used to purchase additional shares on predetermined dates. The number of shares purchased is typically calculated based on the dividend amount and the prevailing market price of the company's stock on the dividend payment date.

Are DRIPs good for investors?

DRIPs offer TWO main advantages for investors. 

First, they provide a convenient way to compound investment returns over time by automatically reinvesting dividends and acquiring more shares. This can be particularly beneficial for long-term investors who aim to build their position in a specific company gradually.

Dividend reinvestment plans often come with lower or no transaction fees, allowing shareholders to reinvest dividends without incurring additional costs. This can be advantageous for individuals who prefer to reinvest smaller dividend amounts that might otherwise be insufficient to cover trading fees.

But it's not all good news; the main disadvantage is availability.

Not all companies offer dividend reinvestment plans, and participation may be subject to certain eligibility requirements. Shareholders interested in participating in a DRIP should check if the company they own shares in provides such a program and review the specific terms and conditions associated with it.

How do I set up a dividend reinvestment plan/DRIP?

Fortunately, instead of going through the steps below, you can set up your own version of a dividend reinvestment plan right in the Trading 212 app. This can be done without the need to arrange it with each company you invest in. You can learn more about how to incorporate Pies and Autoinvest with fractional shares on our website and test it out in the app.

In case you use a brokerage which doesn’t support auto-DRIP, you can follow these general steps:

**Research eligible companies** - identify publicly traded companies that offer DRIP programs. Check their investor relations section on their website or consult financial resources to find companies with DRIP options. Some websites list what they recommend as the best DRIP stocks.

**Purchase shares** - acquire shares of the desired company's stock through a brokerage account or investing app like Trading 212. Ensure you meet the minimum share requirement for participation in their DRIP program, if applicable, which for Trading 212 is as little as £1. 

**Confirm eligibility** - verify if you meet the eligibility criteria set by the company for their DRIP program. Some companies may restrict participation to shareholders with a minimum number of shares or require shares to be held for a certain period.

**Enrol in the DRIP** - contact the company's transfer agent or visit their website to obtain the necessary DRIP enrollment forms. Fill out the required information, including your account details and instructions for dividend reinvestment.

**Submit enrollment forms** - send the completed enrollment forms to the company's transfer agent or follow their specified submission process. Be careful with this process because false or inaccurate info could result in delays.

**Await confirmation** - wait for confirmation of your enrollment in the DRIP program. This may include receiving account statements or other documents outlining the details of your participation.

**Monitor and manage** - once enrolled, dividends will be automatically reinvested into additional shares of the company's stock. Monitor your DRIP account, track your dividend reinvestments, and review any statements or reports provided by the company or transfer agent.

Remember that the specific process and requirements may vary depending on the company and its transfer agent. It's important to carefully review the company's DRIP guidelines, terms, and any associated fees before enrolling.

What are examples of dividend reinvestment?

Let's consider a scenario where you make an annual investment of **$2,000** into ABC Corp, with a **10%** annual dividend yield and an annual share price appreciation of **5%**. Over 20 years, with continual reinvestment, this figure would amount to nearly **$105,000**.

However, finding a consistent yield of 10% with a 5% growth in the share price, also accounting for inflation over 20 years, is harder than you might think. Most dividend aristocrats will pay between 3% - 6%.

We can consider a second scenario where you make an annual investment of **$2,000** into XYZ Corp, with a **4%** annual dividend yield and an annual share price appreciation of **3%**. Over 20 years, with continual reinvestment, this figure would amount to nearly **$55,000** (excluding taxes).

How did we calculate the future value of the investment?

The value of an investment after reinvesting dividends equals the initial investment amount multiplied by (1 plus the annual interest rate divided by the number of times dividends are reinvested per year), all raised to the power of the number of years.


**FV = P × (1 + r / m) m × t**

**FV** = Future value
**P** = Initial investment
**R** = Dividend yield
**M** = Compounding frequency per year
**T** = Frequency of reinvestment

Time combined with a dividend reinvestment program in high-quality companies is one of the most reliable formulas for financial success. The following are some of the best-known companies offering dividend reinvestment, but there are many more on the list.  

#1 - Johnson & Johnson (JNJ)

[Johnson & Johnson (JNJ)](https://www.trading212.com/trading-instruments/invest/JNJ.US) has been offering dividends for over 61 years. Operating within the confines of the healthcare industry, it’s one of the most dependable companies to work with for a dividend reinvestment plan. 

Currently, JNJ has a market capitalization of $416 billion, a 5-year CAGR estimate of 10.8%, and a dividend yield of 2.9%. The minimum purchase is $25 and there is a $1 automatic investment fee for each reinvestment.

#2 - Exxon Mobil (XOM)

Exxon Mobil is the largest oil company in the US, in a sector not well known for offering dividends. It has been offering dividends for over 40 years and boasts a market capitalization of over $400 billion. 

Dividends are paid out on a quarterly schedule. The yield is 3.52%, and the price-to-equity ratio is currently 6.93. Dividend payment rates have grown at 5.9% on average over the past 40 years. The price for [Exxon (XOM)](https://www.trading212.com/trading-instruments/invest/XOM.US) is $102. 

#3 - International Business Machines (IBM)

Despite declining revenues, [IBM](https://www.trading212.com/trading-instruments/invest/IBM.US) continued to pay out dividends and was introduced to the list of dividend aristocrats in 2021. IBM offers a high dividend yield of 4.9%, a share price of $132, and a market capitalisation of $115 billion. 

Despite not performing all that well in the past decade due to a failure to adapt to Cloud and SaaS technology, there is evidence that this could be turning around. In 2022, IBM's revenue saw a return to growth. 

You might be wondering, Does [Apple (AAPL)](https://www.trading212.com/trading-instruments/invest/AAPL.US) have a Dividend Reinvestment Program (DRIP)? It does not, but you can still reinvest your Apple dividends using the Trading 212 investing app. When you include Apple stock in a Pie, your pie can automatically reinvest the dividend income it received. The 'Auto reinvest' option is enabled by default but can be disabled if preferred.

*While the companies mentioned above are examples of companies which offer dividend reinvestment programmes, it is important to note that past performance doesn’t guarantee future results.*

Advantages of DRIPs for investors

There are numerous reasons why participating in DRIPs can be advantageous for investors:

✔️ **Affordable shares** - one major benefit of DRIPs is the ability to obtain additional shares of a company at a significantly lower cost compared to the current market value, sometimes at a small discount.

✔️ **Cost-effective transactions** - another advantage is the low transaction fees associated with DRIPs, which are frequently lower than the commissions charged for outright share purchases. Some DRIP programs even have no fees at all.

✔️ **Dollar-cost averaging** - engaging in a DRIP allows for the gradual purchase of shares over time, regardless of whether the share price is high or low. This approach has the advantage of being easy to execute and avoids emotional investment decisions.

✔️ **Flexibility** - DRIPs typically offer you the flexibility to contribute any desired amount, enabling easier saving and investing based on individual preferences and financial capabilities.

Disadvantages

While DRIPS are something of a gold standard in long-term wealth accumulation, it still comes with downsides you need to be aware of.

❌ **Limited investment choices** - DRIPs are typically offered by specific companies, meaning you may have limited options for diversifying your portfolio. This lack of choice can limit flexibility and potentially expose you to concentrated risks.

❌ **Lack of control over timing** - With DRIPs, the timing of dividend reinvestments is determined by the company's predetermined schedule. You have limited control over when their dividends get reinvested, which may not align with your investment strategy or financial circumstances.

❌ Tax implications - Dividends earned and then reinvested through DRIPs are generally subject to taxes. You could also face the challenge of tracking and reporting the cost basis for the accumulated shares over time. This can complicate tax calculations when selling shares in the future.

*It is important to remember that tax treatment depends on your individual circumstances and regulations, which may change.*

❌ **Administrative complexities** - DRIPs can involve administrative complexities, particularly when managing multiple DRIP accounts from different companies. You may need to keep track of various accounts, statements, and record-keeping, which can be time-consuming and potentially burdensome.

❌ **The opportunity cost of cash dividends** - by participating in a DRIP, you forgo the option of receiving cash dividends. This can be a disadvantage when you could use the cash for other purposes or invest in alternative opportunities.

❌ **Potential overvaluation** - DRIPs may result in the automatic reinvestment of dividends into shares that are overvalued. If the stock price is inflated, investors could end up purchasing shares at an inflated price, potentially leading to lower returns or losses.

It's important for you to weigh these disadvantages against the benefits of DRIPs and consider your individual investment goals, risk tolerance, and overall portfolio strategy before deciding to participate in a DRIP. 

Pros of dividend reinvestment for the issuing company

Why would companies even get involved so directly in how shareholders invest in their stock? They do it because dividend reinvestment can offer several advantages for a company:

✔️ **Capital retention** - by reinvesting dividends into the company rather than distributing them as cash dividends, the company can retain more capital within the business. This retained capital can be used for various purposes, such as funding expansion projects, research & development, debt reduction, or acquisitions.

✔️ **Shareholder loyalty and engagement** - when shareholders reinvest their dividends back into the company, they demonstrate their confidence in the business's future prospects. This can help create a sense of ownership and alignment between the company and its shareholders.

✔️ **Stable shareholder base** - DRIPs can contribute to a stable shareholder base by encouraging long-term investment. Shareholders who participate in dividend reinvestment are more likely to hold their shares for an extended period, which can provide stability and reduce volatility in the company's shareholder base.

✔️ **Cost savings** - Instead of paying cash dividends, which may involve administrative costs and transaction fees, the company can avoid these expenses by retaining the capital and issuing additional shares to shareholders through the DRIP. These cost savings can be particularly significant for larger companies with a substantial number of shareholders.

✔️ **Potential share price support** - dividend reinvestment can provide support to the company's share price. As shareholders reinvest their dividends to acquire additional shares, it creates additional demand for the company's stock in the market. This increased demand can help support the share price and potentially contribute to its stability and upward movement.

It's important to note that the advantages of dividend reinvestment for a company can vary depending on factors such as the company's financial position, growth opportunities, and the preferences of its shareholders. 

As an investor, make sure the decision to implement dividend reinvestment or DRIPs aligns with the company's financial position and strategic objectives.

Cons of dividend reinvestment for the issuing company

While dividend reinvestment can offer advantages for a company, there are also potential drawbacks to consider:

❌ **Dilution of ownership** - When a company issues additional shares through dividend reinvestment, it can lead to a dilution of ownership for existing shareholders. As more shares are created and distributed, each existing share represents a smaller ownership stake in the company. 

*NOTE: This is only the case if the company issues new shares in its DRIP. Most companies will structure their DRIP to use shareholders’ cash dividends to purchase existing shares in the open market.*

❌ **Increased administrative complexity** - implementing and managing a dividend reinvestment program can add complexity to a company's administrative processes. The company must handle the logistics of tracking and processing dividend reinvestment requests, maintaining accurate shareholder records, and issuing new shares accordingly. This administrative burden may require additional resources and time.

❌ Potential misalignment of shareholder interests - By mandating dividend reinvestment, the company could overlook the diverse needs and preferences of its shareholders, potentially leading to dissatisfaction among certain investor groups. Some shareholders may prefer to receive cash dividends for personal income or alternative investment opportunities.

*NOTE: This is only the case in the rare situation that a company mandates all shareholders are enrolled into the DRIP.*

Dividend Reinvestment Plans: What DRIPs Are, How They Work. Are DRIPs good for investors? How to set a dividend reinvestment plan? Examples of reinvestment Plans.

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