Investing in Dividend Stocks: My First Baby Steps

Investing in dividend stocks is a little like investing in rental real estate.Photo by Living in Monrovia @ Flickr.

Warning: This blog is about to get very nerdy.

Another Warning: This is a great time to remind you that I am not an investing or financial professional. At all. This blog is for entertainment purposes only and should not be construed as financial advice.

From 2007 ? 2009 I contributed just shy of $5000 to a company 401k plan. It has been invested in cash that entire time.

Initially that was true because I didn?t know where I wanted to invest it.

Then ? while I was considering my options ? the stock market crashed and I patted myself on the back for having the money in cash.

In 2009, I left the company I worked for, but the process of getting my 401k rolled over into IRAs turned out to be a prolonged one.

Meanwhile, the $5k sat there in cash.

Investing in Dividends

At some point during this time I became interested in investing in dividend stocks. And as often happens, the more I became interested, the more I seemed to hear about them.

I like the idea of stocks that pay dividends because ? along with the growth of the stock itself ? there is the income of the dividends. Those dividends create an income stream that can be reinvested to buy more of the stock, or ? during retirement for instance ? pulled out to live on.

I think of it like owning rental property.

Rental House = Share(s) of Stock

Rents Received = Dividends the Stock Pays

In each case, there are two potential ways to profit from a single investment.

An Opportunity Presents Itself

I had been slowly trying to educate myself on dividend investing, thinking that when our debt was paid off, I could afford to start putting some money in dividend paying stocks.

Then the 401k rollover that I mentioned above finally happened.

I realized that I had this money sitting there that needed to be invested, and ? since it was a small part of the money we had set aside for retirement ? I could afford to use it to experiment with dividend investing.

Dividend Aristocrats

Part of what I was learning about dividends is that not all dividend paying stocks are created equal. And the dividends that a company paid the year before ? or even the five years before ? aren?t necessarily indicative of what they?ll do this year or next.

But there is a way to hedge your bets a little.

Each year, Standard & Poors releases a list of companies that have increased dividends every year for at least 25 years. The list is called the S&P 500 Dividend Aristocrats and it consists largely of blue chip companies. Many ? like Target, McDonald?s, Pepsi, and Johnson & Johnson ? have names you and I have heard of.

Taking the Plunge

As luck would have it, my 401k rollover happened on one day and the Dow took a huge nosedive the next day.

Was this a good time to buy? Was it really the bottom or would the market continue to go lower?

Who knew?? Even the ?experts? on CNBC and Fox Business couldn?t agree and kept debating the point over and over to fill airtime.

But this was to be a long-term investment and ? with the market down almost 300 points ? I decided to go for it.

Picking Stocks

My process for picking stocks was very, very unscientific.

I started with the Dividend Aristocrat List. I eliminated financial and energy stocks right away. (I don?t understand energy stocks at all and financial stocks felt too volatile for me.)

From the rest, I chose ten or so stocks whose names I was familiar with and whose businesses I somewhat understood.

I then headed over to Morningstar and read the summaries of the companies and picked five whose outlook I felt good about.

Here?s what I chose:

• McDonald?s Corp MCD
• Johnson & Johnson JNJ
• Wal-Mart Stores WMT
• Abbott Laboratories ABT
• Coca-Cola Co KO

I tried to have fun with it. This was a learning process for me.

All of this money was in cash and really needed to be invested for the long haul since it was in retirement accounts. The amount was still small enough, however, that I wasn?t worried I was making or breaking our golden years with my decision.

Almost immediately, the value of the stocks went down. It was a crazy trading day. The red numbers in my account took me aback a little bit, but I didn?t sweat it too much. I plan to hold these stocks a long, long time and, even if the share prices don?t rise that impressively over time, I still have the dividends to reinvest.

I look forward to following these stocks and seeing where the share prices and dividends go. I?ll update here from time to time as part of my experiment.

Are you a dividend investor? What has your experience been like?

Disclosure: It should be obvious from this article, but I own shares in MCD, WMT, ABT, KO, and JNJ. Also, did I mention I?m not a financial professional and that this article in no way should be taken as financial advice? Pretty sure I did, but there it is again, just in case.

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Tagged as: Dividend Investing

Source: http://www.thefamilyceoblog.com/2011/08/investing-in-dividend-stocks-my-first-baby-steps/

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