There are so many strategies to consider when buying stocks and figuring out the risk you’re willing to take on. If you’re interested in accruing a lot of stock in a company, or even increasing your holdings in a mutual fund, you might decide to go with a dividend reinvestment strategy. If you do it right, you could certainly double, triple, quadruple or earn even more with each dollar reinvested. But you need to make sure you have the right advisor on your side to do this.
How To Pick The Right Stocks For Dividend Reinvestment
Before you receive dividend payments from stocks, you need to know what kind of stocks you’re buying and figure out if you will receive dividend payments from them. Much of this depends on the track record of the company you want to invest in, and what their current cash flow projections are. Here are the main kinds of stock you can find on the market:
-Blue Chip Stocks
Blue chip stocks are usually the most likely to pay dividends because these are usually companies that have been around for years. You still will want insights into their finances and growth trajectory, and these stocks cost a little more. But they usually are your best bet for dividend payments.
These stocks aren’t always the best dividend stocks to buy now, but they are stocks that are considered low in value and poised to rise. Hence, there may be dividend opportunities here, but they are more risky than blue chips.
Growth stocks also usually don’t have dividend payments at least at the outset, mostly because these are newer companies that haven’t had as much time to get set financially. But if they do issue dividends, they are reinvested back into the company because its main strategy is rapid growth in hopes of quickly becoming a blue chip company. These stocks are far more risky than value stocks though.
These stocks and penny usually are the most risky stocks because they are new startup companies that have no certain trajectory. Your chances of receiving dividend payments from these companies are very low.
Decide Whether To Go With Preferred Or Common Stock
Usually when you are looking at stocks, you’ll have choices to buy preferred or common stock in a company. Preferred stock has a few advantages over common stock in that you can get paid more dividends through owning it, and if the company has to close down, you could potentially recover some of your investment though you don’t have quite the same priority as bondholders. Plus, preferred stock does tend to be a little less volatile than common stock. The bad news is you don’t usually have the same ownership rights in a company that common stockholders do, and you don’t usually have the option to automatically reinvest your dividends in more preferred shares. What you might want to consider doing is look for convertible preferred stock that can become common stock. That way you can later opt to reinvest your dividends.
Other Dividend Stocks To Consider
When looking for good dividend paying stocks, you can also look at companies that are required to pay out dividends. While these two kinds of companies aren’t necessarily considered stocks in the traditional sense, they function mostly like stocks. They are master limited partnership (MLP) companies and real estate investment trusts (REITs). Their structure is a little bit different than that of regular stocks which is by design get certain tax breaks, but they both are listed on public exchanges and can be bought through brokerages like stocks. What’s more is both MLPs and REITs both have to pay out at least 90% of their cash holdings as dividends, so you can usually get a whopping return from this. And yes, you can also automatically reinvest in these companies, and doing so has the potential to really double your investment returns.
In conclusion, you shouldn’t judge the best dividend paying stocks on their yield percentage alone. You need to look at how consistently they’ve paid dividends and focus on the overall growth of their stocks. That’s why it’s important to work with a reputable advisor when you do this.