5 reasons to Buy Dividend Paying Stocks

A few years ago, I reached a place where I had saved up about $20 000 that I was interested in investing in the stock market. I did extensive research for about a year, looking at the various options. Eventually, I settled on dividend stock investing because it seemed not so complicated, not so risky and could offer good returns if done for the long term. I started investing about 2 years ago, and have a steady stream of dividends coming in every month, about $200 or so. I keep investing more money that I make from my job, as well as the dividends. I hope to grow this monthly income to over $1000/month.

You're a newbie and want to know the basics? Well, dividends are simply earnings that a company pays out to its shareholders. Most companies pay 4 times/year, at a set amount/share. The only fees for this investing strategy are the commission that you pay to buy the stock (from $3-$20) and the same fee when you sell the stock. If you sign up with an online discount broker such as Sogotrade, your fees will be minimal.

As with any investing, do your research first and act second. This site is a good place to start!

If you want to increase your income, the easiest way to do this is to make some passive income. You can only work so many hours in a day so to make more money by working more hours is not always possible. This is where passive income comes in. Once you do a little bit of work to get things set up, you can just watch the money rolling in. The work you need to do for dividends is to research stocks, set up a brokerage account and buy your stocks. Then, if you plan to hold forever, you can check on your stocks a couple times a year and make sure that the dividend hasn't been decreased and that your company is still increasing their earnings.

Companies that pay increasing dividends, year after year are generally mature, stable companies. While they may not have the highest growth rates, the chances that they'll go bankrupt are much smaller than the high-growth hi-fliers. The stability of the dividend payers can be great for those looking to not take a lot of risk in their portfolio or for those nearing or in retirement.

These days, not much is guaranteed, but dividend paying stocks offer some of the safest, stable returns that you can find. If you select good companies, with a long-term history of raising dividends, you should be happy with your investment for the next 10, 20, or even 50 years. And with bond rates so low, many dividend paying stocks can offer better returns, with not much more risk.

And actually, more than 90% of the total returns on the S&P 500 come from dividends.

If most of the return in the stock market comes from dividends, it makes more sense to just buy and hold dividend paying stocks for the long-term, instead of trading frequently. This is a good strategy mostly because it can reduce your trading costs. When you have to pay $5 or $10 for every time you buy or sell, it can be difficult to overcome if you're trading too frequently.

To find dividend paying stocks, all you have to do is search on the dividend aristocrats or achievers list for those companies that have been increasing dividends for at least 10 years. Then, look at the payout ratio and find the companies with the lowest number. I only invest in companies with less than 60%. This means that the company is not paying out too much of their earnings in dividends but investing some back into their company or saving it for a rainy day. Then, look for the companies with a P/E ratio of less than 15. These stocks are "cheap." Then, just buy and hold for the long term, until the company falls out of favor, or reduces their dividend.

I like the big, blue-chip companies such as:
Coca Cola (KO), McDonalds (MCD), Kimberly Clark (KMB) and WalMart (WMT).

Some other good choices are the big oil companies:
Chevron (CVX), Exxon Mobil (XOM), and Conoco Phillips (COP).

Some good choices in banking are the big Canadian Banks:
CIBC, Bank of Montreal, TD, Royal Bank, and Bank of Nova Scotia. Internationally, I like Banco Santander.