The concept of dividend investing is one that’s inherently appealing. Basically, when you’re investing with the objective of getting dividends, it’s a way to put the money you already have to use and make more. A lot of older people and retirees have gotten to the point where they can live entirely off their dividends every year, but what about younger people?
Dividend-centric investing can require a lot of money in order to live off your earnings, but at the same time that doesn’t mean that it’s not an option for people who are younger and want to invest. Yes, most of the literature on dividend investing is geared toward older and wealthier people, but young people shouldn’t count themselves out of this scenario.
Look For Companies With a Long History
When you’re young and looking at stocks to buy with dividends in mind, a key consideration should be the company’s history of paying dividends.
You want to be able to locate companies that have not just consistently paid dividends over many years but have also been consistent in raising them.
You might see that some companies had dips during the Great Recession, but otherwise they should have a sustainable history. This is a good indication that a company is more likely to continue paying dividends well into the future, which is important for young investors who want to take a buy-and-hold strategy.
The Power of Compounding
The conventional wisdom with dividend-based investing is that it’s a safer and more low-risk option. Along with the ability to earn income for the investor, it’s better for older investors who can’t afford to take big risks with their money.
Following this line of thinking, younger investors should look at riskier options because they have more time to rebound from potential losses.
So is this the case? Yes and no.
Younger investors should look at a combination of dividend stocks and then more high-risk options as well. The power of compounding is a key benefit of dividend stocks, so if you’re a young investor with decades until you reach retirement age, reinvesting those dividends over the years is going to pump up your portfolio significantly in the long-term.
DRIP is a term that refers to a Dividend Reinvestment Plan. This is related to the idea of compounding dividends, but it’s worth knowing about on its own as well. When you’re an investor, and you enroll in a DRIP, it means that your dividends are automatically used to purchase more shares of the company.
There may be fees to enroll, but once your portfolio becomes larger, these fees are minimal in comparison.
At the same time, you might also want to choose when and how your dividends are reinvested, but it’s good to know the automated option is often available.
Finally, as a young investor, there’s no greater thing on your side than the power of time. You should look at your dividend investing as a long-term venture. This means you don’t have to monitor these stocks on a day-by-day basis. Instead, you can ignore some of the rougher patches that might happen, and think about how the power of compounding dividends is going to benefit your portfolio ultimately.