Investing in the stock market isn't always easy, especially during a downturn. If your portfolio has been hit hard in recent months, throwing more money into the market can be daunting.
Choosing the right investments, though, can sometimes make it easier. Not all stocks are equal, and while the best investments are the ones that see long-term growth, there's also a subset of stocks that will actually pay you to own them. Here's how.
Earning passive income from stocks
Some companies choose to pay a portion of their profits back to their shareholders, which is called a dividend. For each share of stock you own, you'll receive a dividend payment every quarter or year.
Keep in mind, too, that this is in addition to any earnings from the investment itself. Every time you receive a dividend, you can either cash it out or, in many cases, reinvest that payment to buy more shares of stock.
Reinvesting your dividends can make it easier to build a substantial source of passive income. When you reinvest your payment, you'll own more shares of that stock. And the more shares you own, the more you'll receive in dividends. Over time, this cycle can dramatically increase the amount you earn in dividend payments.
Choosing the right stocks
The key to finding success with dividend stocks is to choose wisely when buying. Not all dividend stocks are strong investments, and if the stock itself doesn't thrive over time, your dividends will be at risk, too.
Also, a high dividend is not always a sign of a good investment. The dividend yield is an important factor to consider in a stock, and it's the ratio of a stock's dividend to its price. While a higher yield could mean bigger payments, it could also be a signal that the stock's price is falling.
It's also wise to look at a company's track record of paying dividends before you invest. A stock could look like an attractive option now, but if it has a history of not consistently paying dividends, it could be a riskier bet.
Where to get started
As you're researching stocks, focus first on choosing investments that have strong potential for long-term growth. Buying stocks from healthy companies should be your first priority. Then, consider that stock's dividend potential.
One of the best places to get started is the Dividend Aristocrats. This is a group of companies within the S&P 500 that have increased their dividend payments every year for at least 25 consecutive years.
Not only are these companies solid dividend stocks, but they're also overall strong investments. This means they're more likely to see positive average returns over time in addition to paying out consistent dividends.
Dividend stocks can help create a source of consistent passive income, but it's important to choose your investments wisely. Focus first and foremost on buying solid stocks from strong companies, and the dividends will follow.