What Is Dividend Investing and How Does It Work?

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In the latter case, if profits fall by 10%, there would be no cushion left for management to use. As a very general rule, dividend investors don't like to see more than 60% of profits paid out as dividends.



Focus on High Yields



Another approach is to focus on a high dividend growth rate. This requires buying stock in companies currently paying lower-than-average dividends but that are growing so quickly that within five or 10 years the absolute dollar amounts collected are equal to or higher than what would have been received using the alternative high dividend yield approach.


Dividend Yield Income Example

If a stock pays a $1 dividend and you can buy shares for $20 each through your stockbroker, the stock has a 5% dividend yield because that is the equivalent interest rate you are earning on your money. In this scenario, if you were to invest $1 million in dividend stocks with 5% dividend yields, you would receive $50,000 in dividend income.

Qualified Dividend Income and Margin Accounts

If you are investing in dividend stocks, look for dividends that are designated as "qualified." If you only trade dividend stocks, you might miss out on a tax benefit.


If you invest through a margin account instead of a cash account, it is possible your broker will take shares of stock you own and lend them to traders who want to short the stock. These traders, who will have sold the stock you held without telling you, are responsible for paying you any dividends that you missed since you don't actually hold the stock at the moment.
