In the investing world, there are many different trading methods.
There’s day trading, which is self-explanatory. People buy and sell stocks within the same day for quick profit.
Others take a more long-term route, purchasing and holding a stock for days until they find the opportune moment to sell.
Then we have dividend stock investing.
If you’re familiar with investing apps, you’ve probably heard about apps like Robinhood and Acorns, which have dividend reinvestment plans, or DRIPs.
The dividend, or the cash given back to you by a company after you invest money into it, goes back to you. We’ll get into how soon.
DRIPs have a really convenient quality where they use a method called dollar-cost averaging.
With this method, the investor divides the total amount to be invested The amount going into an investment will now become periodic purchases to avoid any effects of market volatility.
Not only are you given a fair price per share but DRIPS also create their own cycle of investing, returns, and reinvesting.
DRIPs are a lot simpler than you think. There are just a few things to understand so you have a bird’s eye perspective of how they operate.
Once you get a good idea of how they work, you can use DRIPs as an extremely reliable tool in your investment journey.
I find them quite beginner-friendly as well, so don’t kick yourself if you don’t consider yourself well-versed in financial jargon.
Dividends in DRIPs tend to be a democracy. They’re only approved through voting rights of the shareholders, so the power is really in your hands.
Big companies, mutual funds, and exchange-traded funds (ETFs) pay dividends as well.
So when a company receives a high volume of investments, it basically “rewards” its shareholders with a payment originating from the net profit it earns.
Obviously, the company keeps a majority of its profits as retained earnings. Those go to the company's future business endeavors.
If you own 20 shares in that company and the company pays $5 in annual cash dividends, you get $100 annually.
This is all calculated and then the company's board of directors can choose to distribute dividends over a scheduled period of time.
But how do you receive that money?
The most commonly used dividend is a cash dividend.
Think of playing Monopoly and pulling a “chance” card. The card says you were paid a $100 cash dividend by the bank.
There are only two requirements for a company to have to distribute cash dividends. It has to have cash on hand to be able to distribute as well as retained earnings.
So in short, a company has to be performing well. A failing company can pay its shareholders with dividends to save it some time to possibly bounce back. But for cash dividends, a company has to be able to distribute money to its shareholders and have some leftover.
Preferred dividends are payouts of fixed stocks paid to shareholders on a quarterly basis in most cases.
They tend to be compared with bonds more because of their indefinite shelf life. The shareholders of preferred dividends are paid before “common” shareholders. The difference between the two is that the preferred shareholders are issued their shares through banks or insurance companies.
All of a company’s common stock can be distributed through special dividends. There’s no immediate distribution of these and they aren’t recurring. This is an accumulation of profits over a duration of time that a company votes on distributing.
If a company is feeling generous with its shares, it can give its shareholders even more shares with stock dividends.
This is usually to promote more long-term trading with the company and to reward its shareholders with possibly more returns.
DRIPs, of course, are the star of the show. At a discounted price, a company can set up a cycle of taking the dividends intended to go to a shareholder and putting them back into a company’s stock automatically.
Knowing the difference between each type of dividend will come in handy — you don’t want to wait longer than you intended just to reinvest in a company, right? Imagine accidentally signing up for a special dividend rather than a DRIP because you couldn't tell the difference.
This is where your newfound knowledge of the distinction between each dividend comes in.
Say you really like the money you’re getting out of a stock and you want to keep investing, but you’re hesitant of a convoluted, drawn-out process.
When apps like Robinhood provide their users with a DRIP now, it’s hard for anyone who invests through the app to ignore the new feature.
The convenience of literally flipping a switch is in the palm of your hand.
But now you need to know IF you should reinvest.
This is where you need to calculate yield percentages in a company.
Yields are the cash flow per dollar you invested.
The idea is to get a decent yield percentage out of your investments. Usually, 4%–6% is a pretty good average.
Calculating yields requires a little math, so bear with me for a second.
We’re going to use Apple (NASDAQ: AAPL) as an example.
In early 2020, Apple announced its dividend at $2.62 per share.
Most companies usually announce their annual dividends per share on their websites along with their price per share.
We’re going to take that number and divide it by the price per share of Apple at the time.
This makes Apple overvalued. Shocker.
An overvalued stock with a low dividend yield is one to stay away from — far away.
Thankfully, now that you know how to calculate the yield percentages, you can decipher which companies are suitable for your investment and which ones aren't.
Online brokers like SoFi, Interactive Brokers, and E-Trade don’t require a minimum to start an account nor do they take a single cent out of any of your trades.
That’s definitely a huge help for those just starting out or transitioning into online trading from a different method.
A common strategy used with dividend reinvestments is timing the market.
Usually, the investor will continue their scheduled deposit of their dividend receipts in their account. Then they wait.
The investor will wait for a decline in the market and use the dividends they've received to invest in a stock at a lower price.
Shorting stocks via dividends is a little risky, and this method is used by investors who devote a lot of time to studying the market and analyzing it for trends.
You have the tools and you have the opportunity. What next?
Say you’re hesitant to reinvest because you’re aware of panic buying/selling in the market.
We get it, volatility is a real thing.
Thankfully, we mentioned dollar-cost averaging earlier.
Using DRIPs, you’re able to set a fixed price on the amount you invest over a period of time.
For example, say you decide to invest $200 a month in an index fund that tracks the S&P 500. It’s a common investment, but the S&P 500 could fall victim to high highs where fewer shares are going to be purchased or there could be lows where you get a lot more out of that monthly $200.
But either way, your fixed price braces you against bigger losses and could still set you up for higher gains now that you’re not putting in any more or less than you feel comfortable with.
Think of your monthly phone plan. You agreed with your carrier on a set price to pay every month based on how much you text, use the internet, etc. You don’t want to pay more for what you don’t use, right?
Now, dividends do come with taxes.
This is why most people use either an IRA or 401(k) to avoid taxation.
It might seem like a negative that you may have to wait a certain amount of time to withdraw from a dividend account, but keep in mind that most companies honor a discounted price if you follow a reinvestment program with them.
So even if you just use a DRIP through an online brokerage and not through a retirement program, you’ll still be able to save some money.
The times they are a-changin’. Planning accordingly is definitely on the wiser side now that access to purchasing stocks is so common these days.
The commodity of online investing is speaking to younger audiences, making a huge change in the dynamic.
The average age of Acorns and Robinhood users is 31.
The Reddit forum that short squeezed GameStop at the beginning of this year was 6 million strong.
The stock market has never been a playground, but the demographics for those who follow it religiously are slowly changing.
In 2018, only 37% of the 18–34-year-old age group was likely to invest in stocks.
But as of 2020, 1 out of every 4 millennials report having at least $100,000 in savings.
If that’s crazy to read, let me explain.
The $100,000 reported by Bank of America isn’t a Scrooge McDuck-ian vault that a 28-year-old has lying around their house.
Retirement savings like 401(k)s and individual retirement accounts are a huge chunk of that reported $100,000.
Millennials are actually taking investing and retirement plans a lot more seriously than one would guess. The average age of millennials starting to invest is 24 years old — almost a 10-year difference from when baby boomers started.
But this isn’t about “my horse is bigger than your horse” in terms of the generational sectors.
Whether it's the 24-year-old just starting out their career or the seasoned Wall Street broker, DRIPs are something to take into consideration.
So if you want to get a head start on high-yield percentage stocks before the new kids on the block get to them, I’d keep an eye on certain stocks with a higher dividend yield.
If you ARE a new kid on the block, I suppose finders keepers?
2. Gilead (NASDAQ: GILD)
3. Albemarle (NYSE: ALB)
4. Linde (NYSE: LIN)
Reinvesting using dividends is one of the lowest-risk investment tactics in the financial world.
Especially now with such easy access that you can basically go on autopilot. You'll maintain full control over the repurchasing factor, and you can turn a switch and change the date, time, etc., on your accounts, but the cycle itself will be automatic. Plus, there aren’t any online brokerage fees if you pick the right site.
Now, most people tend to read breakdowns on certain investment strategies with a certain market in mind.
Sadly, these reports can’t read your mind to give you better insight on a chosen market.
But what they CAN do is send you to Outsider Club, where you can navigate through an array of tips and tricks in the financial world.
Outsider Club can also hook you up with the latest updates on red-hot stocks in the market of your choosing!