Passive dividend income can be an important step as you work towards financial security. Dividend-paying stocks deliver regular dividend payouts to shareholders, often on a quarterly schedule. Although any stock investment involves some risk, prudent research and planning can enable you to make smart choices. Select a solid group of dividend-paying companies to fill your portfolio and fit your investment and income goals.
1. Use Internet tools to search for stocks that meet your investing criteria. Visit a website such as Financial Visualizations or ILoveDividends that lists stock information to enable you to search for and analyze stock information.
2. Check the dividend yield of stocks you are considering. Dividend yield is a computation that uses the upcoming 12-month anticipated dividends divided by the share price. Strive for dividend yields that range between 3.5 and 4 percent. Higher yields, while tempting, usually represent a greater investment risk.
3. Choose solid, long-standing companies with a history of increasing payouts. These mature companies usually have low debt and are operating soundly, which means they represent a lower risk to investors. Larger companies are often less risky than smaller companies because they will usually weather economic fluctuations better. Include international companies, also, especially when the U.S. dollar is weak against foreign currency. International stock can increase dividends when the exchange rate favors your home currency.
4. Create a diversified portfolio that includes between 15 and 20 different stocks. Stock diversification lowers your investment risk by spreading your investments out across a variety of industries. Choose noncorrelated stocks in different industries so that negative economic changes that affect one industry will not negatively impact your entire portfolio. Depending on your goals and risk tolerance, round out the stocks in your portfolio with other, lower risk investments such as bonds, certificates of deposit and money market funds. A combination of lower and higher risks creates a balanced portfolio.
5. Note the dividend-paying schedule of the stocks. Most stocks pay quarterly, but they often pay on differing dividend cycles. When you spread your investment across stocks that pay on the first, second and third cycle, you can often receive dividend payments every month of the year.
6. Reinvest at least a portion of the dividends each month by purchasing more dividend-paying stocks, if possible. This enables you to increase monthly dividend income each month.
7. Report your dividend income with your taxes. The dividend-paying companies must issue Form 1099 to shareholders receiving dividend income. Generally, you will report dividend income as ordinary income. In some situations, dividend income may qualify for a special tax rate if it meets qualifications. As long as the company is a U.S. company, you meet shareholding period requirements and the dividends are not capital gains from a tax-exempt company or an employee stock ownership plan, you may be able to use a special tax rate for the dividend income.
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