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You hear a lot about dividends, but what's the best way to start the lengthy but prosperous journey of building wealth as a dividend stock investor? That's the question one person recently posed on Reddit (RDDT +1.42%). The poster explained that they were looking to invest $100 per month in dividend-paying stocks, but didn't know where to start.
Dividend to toss $100 a Month into for the next 20 years anddd go!
by u/EL_BUNDO in dividends
The person posing the question already maxes out their Roth IRA, which is an excellent move! Additionally, they fund their brokerage account and want to begin investing $100 per month in dividend stocks. The poster is 28 years old, leaving them decades for compounding to work its magic.
However, the poster isn't sure where to go from here.
So, where might someone in this situation, or a similar one, consider starting to build a dividend portfolio that will continue to grow and provide income and growth over the next couple of decades or beyond?
Here are some ideas to consider.
Image source: Getty Images.
Start with a diversified dividend ETF to learn the ropes
One of the simplest ways to invest for dividends is to use exchange-traded funds (ETFs). It's crucial to diversify your portfolio so you don't have too many eggs in a single basket, and that's a natural feature of ETFs.
The Schwab U.S. Dividend Equity ETF (SCHD +0.16%) is a popular choice among investors. With many higher-yielding stocks among its top holdings, the ETF offers a strong starting yield of approximately 4% today.
A younger investor, such as the Reddit poster mentioned above, may benefit from an ETF with more potential dividend growth. In that case, consider the Vanguard Dividend Appreciation ETF (VIG +0.96%). Its starting yield is lower, at 1.7%, but it packs several high-quality dividend growers among its top holdings.
The Schwab U.S. Dividend Equity ETF trades at approximately $27 per share, fitting nicely into the poster's monthly budget. The Vanguard Dividend Appreciation ETF trades at around $200 per share, but it has a minimum investment of just one dollar, making it easy to invest a set dollar amount to buy partial shares.
Fill in around ETFs with blue-chip dividend stocks
ETFs can make a sturdy foundation for any portfolio, regardless of your investing experience. After that, it's time to do some window dressing, and blue chip dividend stocks are an excellent way to go. These are profitable and proven individual companies with established records of paying and increasing dividends.
Remember that dividends are a cash expense for companies, so the ability to consistently increase them is a sign that the company has a strong and growing business model. These stocks may not necessarily have explosive growth, but their consistency can add up to tremendous investment results over a decade or two.
What makes a good dividend stock? Start by looking into companies that have raised their dividends annually for at least 10 consecutive years. That would mean they raised their dividends through the worst COVID-19 pandemic years, a noteworthy accomplishment.
A company with 25 years of consecutive increases raised its dividend through the 2007-2009 financial crisis, another badge of honor. Lastly, there are some companies, known as Dividend Kings, that have raised their dividends for at least 50 consecutive years. No business is guaranteed to succeed forever, but these are as close to timeless companies as you'll find.
Of course, learn about a company's business model, its growth prospects, and its dividend payout ratio before deciding which dividend stocks ultimately make it into your portfolio.
Consistency isn't flashy, but it will produce results
The most challenging aspect for most new dividend investors is the initial feeling that nothing is happening.
If you invest $100 into a dividend stock, you're probably only getting $1 to $4 in annual dividend income from that. But I can promise you that it adds up over time. Continue to add that $100 each month, and set your brokerage account to reinvest the dividends, so that even those small sums buy just a little bit more dividend income each time you get paid.
I liken dividend investing to a snowball rolling down a hill. Sure, it's small and harmless at first. But then, it picks up steam. It grows larger. Eventually, it's an unstoppable force of nature.
Your dividend portfolio probably won't impress you early on. But eventually, it could pay so much in dividends that it covers your living expenses. That's financial freedom without having to sell any of your stocks. That's a goal worth going for.
