When you start your dividend investing journey, earning your first $1,000 may seem like a distant dream. But the right plan and strategy can accelerate your goals and allow more dividends to flow into your account in a short period of time.
If you're ready to roll, here are a few tips to help you reach your first $1,000 milestone. If you have surpassed that, you can still leverage these tips to achieve your next goal.
The 411 on dividends
First, it's important to understand how dividends work. They are a form of passive income that investors can receive without lifting a finger. But the money doesn't come from thin air; it's a portion of profits that a corporation agrees to distribute to its shareholders.
When you invest in dividend-paying companies, you gain access to a recurring stream of income -- as long as a company's board of directors continues to declare a dividend. Most companies pay dividends quarterly, but there are some that pay monthly. Your recurring dividend income is based on the number of shares you own. If a company pays a $4 annual dividend per share and you own 250 shares of the company's stock, you've just earned $1,000 in dividend income! Make sure you understand the company's dividend rules so you can be eligible to receive the income.
Design your dream portfolio
Dividends are an incredible source of income because you have the flexibility to create a portfolio that aligns with your goals. If you want to earn $1,000 in the next 90 days, all you have to do is buy a certain number of shares of dividend-paying stocks to make your dividend dreams come true.
First, consider how much money you have or what you plan to allocate toward your investing goals on a consistent basis. Then, determine the dividend yield you would need to receive in order to achieve your income goals. The challenging part for most people is selecting the best mix of high-quality dividend stocks to add to their portfolio.
For starters, take a look at the stocks that have been paying dividends for decades. There's a special class of dividend payers that have increased their dividends to shareholders every year for at least 25 consecutive years. These companies are called Dividend Aristocrats and they have the power to grow your portfolio every year. These stocks are known for giving you an automatic "pay raise" by increasing their annual dividend amount every year.
If you want to accelerate your path to the $1,000 mark, take a look at high-yielding dividend stocks. There are stocks that pay you a dividend yield of over 6% and allow you to earn more money with your money.
But be careful not to fall for a dividend trap. A company may have a high yield that looks very attractive, but the underlying business model may be in shambles and the company is at risk of cutting its dividend or not being able to sustain it at all.
It all comes down to this: Do your research and identify the best stocks that align with your risk tolerance and goals.
Automate your success
Now that you have an idea of how dividends work and how you can design your portfolio, let's create a hands-free dividend portfolio to achieve your first milestone.
First, fund your account and set up automatic deposits from your checking to your brokerage account. Then, select your stocks. Once you have your stocks, set up the dividend reinvestment plan (DRIP) for your eligible stocks. Instead of getting cash for your stocks, your dividend income is reinvested back into the company so that you can accumulate additional shares of the company stock. Now your dividends have a chance to create more dividends. You don't have to do anything to keep this DRIP running because it's set up automatically to buy more shares when you earn dividend income.
Your first $1,000
Earning your first $1,000 in dividend income is exciting. It means you've broken down the mental barriers and positioned yourself to earn a recurring stream of income without adding another arduous task to your daily checklist.
The next step is determining where you want to earn your first $1,000 in dividends. You can open a taxable brokerage account. You'll have to get up to speed on how taxes work so you won't be hit with an unexpected tax bill later. Another option is to start investing in your Roth IRA. You'll gain access to an extra stream of tax-free income that you can enjoy during retirement.
There's a lot to consider, but what's most important is that you get started. Be willing to start where you are and grow as you go. Once those dividends start flowing into your account, you'll be inspired to achieve your first milestone as soon as possible.