Dividend investing
Dividend investing is an investment strategy that focuses on buying shares of companies that pay out part of their profits to their shareholders. You can reinvest these dividend payments to increase your investments, and thus long-term returns, or use them as a source of income. Like any investment, dividend investing involves risks.
Please note: trading on the financial markets involves risks, you can (partially) lose your investment.
What are dividends?
When you buy shares in a company, you may receive dividend payments. A dividend is a payment for shareholders when a company decides to distribute part of its profits.
Dividend payments can vary from year to year, although many companies pay dividends at least once a year. Reinvesting your dividends can increase your future dividend income over time.
European brokers
European trading platforms that are popular to start investing with are:
At the online broker DEGIRO, you can personally invest worldwide in stocks, bonds, funds, ETFs, options, and futures. DEGIRO is the market leader in the Netherlands and is known for its low fees and high user convenience. Note that investing can result in the loss of your capital.
- used by 3.5+ million investors
- low costs (low spreads)
- assets under custody: 95+ billion euros
- trade on 50+ global exchanges
- 5-star award winner (Financial Times)
If you want to trade and invest all by yourself eToro is currently Europe’s online brokerage champion. You can trade in stocks, commodities, crypto and other currencies. Templates allow you to invest directly in a variety of sectors. Don’t invest unless you’re prepared to lose the money you invest.
- beginner-friendly platform
- you can copy other traders
- 24/5-trading (S&P 500 & Nasdaq 100)
- premade investment strategies
- zero commission on ETFs
- over 40 million users worldwide
Invest through this European broker in stocks, ETFs, and crypto. Transactions in iShares ETFs and investment plans are free; other trades cost 0.99 euros. With Prime+ (4.99 per month), trades from 250 euros are free. Uninvested funds earn an expected return of 2 percent.
- 20+ billion euro in assets under management (AUM)
- flat-fee model for 4.99 euro per month (PRIME+)
- extended trading hours (07:00 to 22:00)
- Stop-loss and take-profit orders available
- fractional investing in stocks and ETFs
- founded in 2014, Munich Germany, regulated by BaFin
What is dividend investing?
Dividend investing is a long-term investment strategy. Instead of focusing mainly on share price growth, dividend investors look for companies that regularly pay dividends. Many investors reinvest these payments to benefit from compounding over time.
Dividend-paying companies are often mature businesses with stable earnings. Younger companies and startups are less likely to pay dividends because they usually reinvest their profits to support future growth.
This investment style aims to build up and reinvest dividend over a long period of time.
Risks of dividend investments
Dividend growth investing is considered a long term investment. But like any investment, it comes with some risk. Firstly, after buying stocks the value of your shares can drop.
Share prices can fall for many reasons, such as weaker financial results, changing market conditions or lower investor confidence. Even commercial businesses on the stock exchange cannot be profitable all the time. And their prospects do not always turn out as expected. For these reasons, risk spreading is important for dividend investors. Make sure to spread your assets over multiple stocks in several different markets to minimize risk.
After dividends are being paid, stocks usually decline in value and you have to wait till the market recovers.
Furthermore, the share price usually declines on its ex dividend date, because at that day it is set who will get paid dividends. As investors already expected the dividend, it was usually within the share price. Therefore, to really make a profit on your deposit, you must wait until the stock price recovers.
However, this is not a guarantee. A company can also choose to stop paying dividends or cut down on them. When this happens, you miss out on dividends and suffer a stock price loss.
Returns of dividend growth investing
Since most stocks that pay dividends are from established and profitable companies, dividend investing can be seen as a defensive and sometimes even a relatively boring investment strategy.
When a company pays dividends, it usually means it has been profitable over a longer period of time. Because dividend-paying companies are often mature businesses, they can add stability to your investment portfolio. For this reason people build up retirement funds by investing in dividend-paying stocks, for example.
Dividend growth investing is a long-term strategy. Reinvesting dividends over many years can increase your total return through compounding. In addition, regular dividend payments can provide a steady source of income and help offset periods of weaker share price performance.
Assessing stock value: dividend yield
Dividend yield shows the annual dividend as a percentage of the current share price. A higher dividend yield means a higher annual dividend relative to the share price, but it is not always a sign of a better investment.
Many dividend investors look for companies with a sustainable dividend yield. Although this varies by industry, a dividend yield between 4 and 5 percent can be considered healthy.
Invest via Mintos, Europe’s P2P leader with 11.62% average return, or Freedom24 for top-rated bonds (B+) with 6% yield, starting at 1000 euro. Investing involves risks. You can lose your investment.
Finding high dividend stocks
The easiest way to start is by investing in a dividend ETF. Dedicated dividend ETFs invest only in dividend-paying companies, provide instant diversification and require little research, making them a good choice for beginners.
More experienced dividend investors often prefer to build their own portfolio. Because dividend-paying companies are usually large, mature businesses with more stable share prices, it is possible to create a well-diversified portfolio with a limited number of selected stocks.
This gives you more control over the companies you invest in. Diversification is still recommended, but it allows you to avoid specific sectors or companies that you prefer not to invest in. If you build your own portfolio, look for companies with a long history of stable or growing dividend payments. It is also important that the company is consistently profitable and has a strong financial position.
