In a recent video, financial guru, attorney, and entrepreneur Jaspreet Singh said “most people are investing in dividend stocks the wrong way. People tend to pick the dividend stocks with the highest dividends, but there’s a smarter way to choose.”
Stocks can be a great vehicle to grow your wealth, but dividend stocks can take it a step further and accelerate your financial growth — if you choose correctly.
What Are Dividend Stocks?
According to Investopedia, dividend stocks are issued by companies that pay out regular dividends. Dividend stocks usually represent well-established companies with a track record of distributing earnings back to shareholders.
The idea behind dividend stocks is that you’ll not only own shares of a particular company, but you should also get a regular payout just for owning the stock.
Singh’s Dividend Stock Purchase Strategy
Singh outlined his method for choosing which dividend-paying stocks you should purchase. To start, “look at a company’s dividend history,” noted Singh. This won’t guarantee your earnings but will provide a better idea of how the company has performed in the past.
Here are three “types” of dividend-yielding stocks to look for:
- “Dividend Achiever” stock: One categorized as a company that has paid out and increased its dividend yield every year for the last 10-plus years.
- “Dividend Champion stock: One categorized as a company that has paid out and increased its dividend yield every year for the last 25-plus years.
- “Dividend King” stock: One categorized as a company that has paid out and increased its dividend yield every year for the last 50-plus years.
ETF Alternatives to Individual Dividend Stocks
Singh highlighted that you can also choose to invest your money into a dividend-paying ETF rather than a stock. Investopedia defines a dividend-paying ETF as an exchange-traded fund (ETF) designed to invest in a basket of dividend-paying stocks. The fund manager will choose a portfolio of stocks, based on a dividend index, that pays out dividends to investors, thereby working as an income-investing strategy for individuals that purchase the ETF.
This alternative can be strategic because if a single company goes bankrupt, you won’t lose all of your money and cash flow. If one of the companies in a dividend ETF goes bankrupt, the other companies in the fund will ultimately balance out the value. This way, you’re more protected against loss.
Singh suggested several dividend ETFs:
- PFM (Invesco Dividend Achievers ETF): invests in 400 different companies
- SPYD (SPDR Portfolio S&P 500 High Dividend ETF): invests in 80 different companies,
- VYM (Vanguard High Dividend Yield ETF): invests in 462 companies.
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