To invest in a brokerage account, that account needs to be funded. And generally, the person funding that account is none other than you.
You might come up with some cash to invest by spending carefully and cutting back on non-essential expenses. Or, your investment dollars might come from the side hustle you push yourself to work.
But what if you were able to score a continuous stream of cash in your brokerage account? It might sound like a scam, but it’s not. All you need to do is add dividend stocks to your portfolio.
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The upside of dividend income
Not all stocks pay dividends, but many well-known (and not so well-known) companies do. When a company pays dividends, it’s sharing its wealth with its investors.
See, companies don’t have to pay dividends. A company that opts not to pay dividends can instead choose to reinvest its revenue back into the business and grow it. But dividends tend to keep investors happy, so there can be pressure on businesses to pay them.
Usually, dividends are paid quarterly, though some companies pay them monthly. Companies can also choose to pay a special dividend, which is a one-time payment outside of a regular dividend schedule.
As an investor, dividend income can benefit you in two ways. First, you can cash out your dividends and use that money however you please, whether it’s paying bills or improving your home. You can also reinvest your dividends so you’re able to grow more wealth in your brokerage account.
Many brokerage accounts let you set up automatic dividend reinvestments. In that case, you wouldn’t have to take action after receiving a dividend. You’d sit back and do nothing, and that income would be used to buy more shares for your portfolio.
Be careful when choosing dividend stocks
Some investors focus their strategies on dividend income. But fixating on dividends could lead you to buy a company that’s not such a great investment. It’s a good idea to think of dividends as bonus income, and to focus on companies whose stock you think will gain value over time.
As an example, Realty Income Corp, a real estate investment trust (REIT) that owns a portfolio of commercial properties, has a dividend yield of 6.27%. That’s pretty generous.
But if you look at the company’s performance over the past year, you’ll see that its stock is down almost 17%. So while you may be tempted to chase that high dividend yield, in a situation like this, you’d want to do some research to see why the stock has lost value over the last 12 months and what the company’s long-term prospects entail.
All told, it’s possible to score extra cash in your brokerage account through dividend investing. But you don’t only want to look at dividends when choosing your stocks. Instead, make sure the companies you’re buying are financially strong with ample growth potential.
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