How and what do you invest in to get a dividend income?
Investing in dividends is not difficult – in fact, if you have ANY investments, especially those in mutual funds, you may already be getting dividends.
You can invest to get dividends in 3 ways:
- Investing in stocks/companies that pay dividends
- Investing in dividend-focused mutual funds
- Investing in index mutual funds
But before we begin….
What is a dividend yield?
It is money that a company pays out to shareholders at the end of the year.
You gotta have good cash flow (and free cash flow to do this), because cash doesn’t lie. If you don’t have the cash for dividends, something is wrong with your company.
Dividend yield changes because it is based on MARKET price of the stock.
If the set price is $2.33/stock per year, this means if the stock price is $50.45:
$2.33 / $50.45 = 4.61%
If the stock price went up to $100:
$2.33 / $100 = 2.33%
If the stock price went down to $10:
$2.33 / $10 = 23%
You can’t just go on dividend yield, you need to look at the fundamentals of the company itself, and other such things, because in an economic downturn, you’ll want to panic and sell if you bought blindly.
1. Investing in stocks/companies that pay dividends
Let’s look at Telus (T):
You can see on the Globe & Mail Stock Page for Telus, that the payout is $2.33 a year, and currently based on market prices, the yield is 4.68% give or take (I calculated it in that minute as 4.61%)
This means that for every stock you earn, you will get $2.33 in dividends that year.
You can also see their individual dividend history payout on their page:
Investing in dividend-focused mutual funds
You can decide to pick a dividend-focused mutual fund, like the TSX Dividend Aristocrats, and just diversify in all of them at once for a small fee:
You won’t see that they pay a dividend for the fund itself, like on the Telus stock page, but you will see that they hold ONLY dividend paying stocks:
There is more on the page.
You can use this as a list to buy your own individual stocks to avoid paying the fee, or buy into this fund to diversify for a small fee. Depends on your budget, portfolio and interest.
Be careful – it can be difficult to find their MERs. In fact, for this particular one I cannot figure out who runs it.
The closest one seems to be BlackRock’s iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ) , and they charge this as their MER: 1.26%
You could… just… avoid this fee and buy each stock individually, unless you want to buy into this fund just to diversify into European stocks as you don’t have the ability to buy these individually as an investor.
Otherwise, you can just buy these Canadian or American stocks and be done with this fee.
Investing in index mutual funds
Simple, index mutual funds also pay dividends.
Well in 500 companies, you have some that pay dividends, right?
The S&P 500 is no different as an example – it pays 1.81%.
Of course, at 1.81%, it will take a lot more invested, to get dividends that you can take as an income each year to live on…
Dividends should get reinvested under a DRIP (Dividend Reinvestment Plan)
I personally put all my investments on a DRIP. I want all that money to go back into buying more of that stock for 3 reasons:
- I believe in the stock and its long-term viability
- I save on trading fees
- It’s automatic – from whatever I earn in dividends, goes right back into buying more
Until it is time for me to “retire”, then I’ll stop DRIP on these dividend funds, and just take the straight cash / funds each time it gets deposited into my account.
- Dividend Growth Machine
- Step by Step Dividend Investing
- Dividend Stocks for Dummies
- Dividend Investing
- Little Book of Big Dividends