When it comes to the stock market, millennials aren’t exactly embracing it with open arms. Recent reports show that they hold most of their investments in cash. While cash is king in terms of liquidity and safety, it doesn’t have the same return potential as a stock or a mutual fund. For young investors who are cautious about investing, dividend investing may be something worth considering. If you’re ready to give it a try, here are four tips to keep in mind.
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1. Stick With Established Brands
Dividend stocks are securities that pay shareholders a portion of the company’s earnings. If you don’t know a lot about them, it’s a good idea to consider investing in a company with a track record of consistently paying out dividends.
For example, the dividend aristocrats are S&P 500 companies that have paid out dividends at an increasing rate for at least 25 years in a row. Some of the blue-chip stocks that fall under that category include companies like AT&T, Chevron and Coca-Cola. Putting money into those kinds of companies can be reassuring to millennials who are nervous about investing in stocks.
2. Don’t Be Wowed By Overly High Yields
While dividend stocks can provide you with a steady stream of income, not all of them will produce the kinds of investment returns you’re looking for. One of the easiest ways to compare dividend stocks is to look at dividend yields. If you’ve got your eye on a stock with a yield that’s much higher than others in the same sector, you may need to think twice about investing in it.
An above-average yield can disguise a stock that’s on shaky ground. Even if it has a high divided yield, a company may have difficulty maintaining the same payout level from one year to the next. If you come across a company that’s paying out dividends at a much higher rate than its competitors, you’ll have to ask yourself whether that’s really sustainable.
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3. Reinvest Automatically
When you purchase a dividend stock, you have the option of getting your dividends paid out to you or reinvesting them in additional shares. If you’re still living like a broke college student, getting a check for a few hundred or a few thousand bucks may feel like hitting the jackpot. But in the long run, you might be better off reinvesting those earnings.
4. Pay Attention to the Payout Ratio
Simply put, the payout ratio is the fraction of a company’s earnings that are paid out to investors as dividends. This is essentially a measure of how sustainable a company’s cash flow is.
Without getting too technical, it’s best to steer clear of any dividend stock whose payout ratio is near or at the 100% mark. That means the company is paying out everything it has coming in, which could suggest that it may not be able to pay its shareholders consistently in the future.
Related Article: The Newbie Investor’s Guide to Fees
Final Word
While stocks tend to be volatile, investing in dividend stocks can be a good way for millennials to play the market without exposing themselves to more risk than they’re comfortable with. Taking the time to fully vet different dividend stocks before jumping in is important for young investors who are ready to expand their portfolios.
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