Saving & Investing

Investing in Dividend Stocks: My First Baby Steps

August 8, 2011
Investing in dividend stocks is a little like owning rental real estate.Photo by Living in Monrovia @ Flickr.

Warning: This blog is about to get very nerdy.

Another Warning: This is a great time to remind you that I am not an investing or financial professional. This blog is for entertainment purposes only and should not be construed as financial advice.

From 2007 – 2009 I contributed just shy of $5000 to a company 401k plan. It has been invested in cash that entire time.

Initially that was the case because I didn’t know where I wanted to invest it.

Then – while I was considering my options — the stock market crashed and I patted myself on the back for having the money in cash.

In 2009, I left the company I worked for, but the process of getting my 401k rolled over into IRAs turned out to be a prolonged one.

Meanwhile, the $5k sat there in cash.

Investing in Dividends

At some point during this time I became interested in investing in dividend stocks. And as often happens, the more I became interested, the more I seemed to hear about them.

I like the idea of stocks that pay dividends because – along with the growth of the stock itself – the dividends create a stream of income. That income stream can be reinvested to buy more of the stock, or – during retirement for instance – pulled out to live on.

I think of dividend investing like owning rental property, where the rental house = share(s) of stock and the rents received = dividends the stock pays.

In each case, there are two potential ways to profit from a single investment.

An Opportunity Presents Itself

I had been trying to educate myself on dividend investing, thinking that when our debt was paid off, I could afford to start putting some money in dividend paying stocks.

Then the 401k rollover that I mentioned above finally happened.

I realized that I had this money sitting there that needed to be invested, and – since it was a small part of the money we had set aside for retirement – I could afford to use it to experiment with dividend investing.

Dividend Aristocrats

Part of what I was learning about dividends is that not all dividend paying stocks are created equal. And the dividends that a company paid the year before – or even the five years before – aren’t necessarily indicative of what they’ll do in the future.

But there is a way to hedge your bets.

Each year, Standard & Poors releases a list of companies that have increased dividends every year for at least 25 years. That list is called the S&P 500 Dividend Aristocrats, and it consists largely of blue chip companies. Many — like Target, McDonald’s, Pepsi, and Johnson & Johnson — are companies that you and I have heard of.

Taking the Plunge

As luck would have it, my 401k rollover happened on one day and the Dow took a huge nosedive the next day.

Was this a good time to buy? Was it really the bottom or would the market continue to go lower?

Who knew?  Even the “experts” on CNBC and Fox Business couldn’t agree and kept debating the point over and over to fill airtime.

But this was to be a long-term investment and — with the market down almost 300 points — I decided to go for it.

Picking Stocks

My process for picking stocks was very, very unscientific.

I started with the Dividend Aristocrat List. I eliminated financial and energy stocks right away. (I don’t understand energy stocks at all and financial stocks felt too volatile for me.)

From the rest, I chose ten or so stocks whose names I was familiar with and whose businesses I somewhat understood.

I headed over to Morningstar and read the summaries of the companies. I picked five whose outlook I felt good about:

  • McDonald’s Corp MCD
  • Johnson & Johnson JNJ
  • Wal-Mart Stores WMT
  • Abbott Laboratories ABT
  • Coca-Cola Co KO

I tried to have fun with it. This was a learning process for me.

All of this money was in cash and really needed to be invested for the long haul since it was in retirement accounts. The amount was still small enough, however, that I wasn’t worried I was making or breaking our golden years with my decision.

Almost immediately, the value of the stocks went down. It was a crazy trading day. The red numbers in my account took me aback a little bit, but I didn’t sweat it too much. I plan to hold these stocks a long, long time and — even if the share prices don’t rise that impressively over time — I still have the dividends to reinvest.

I look forward to following these stocks and seeing where the share prices and dividends go. I’ll update here from time to time as part of my experiment.

Are you a dividend investor? What has your experience been like?

See also: Dividend Investing: A One Year Update

Disclosure: It should be obvious from this article, but I own shares in MCD, WMT, ABT, KO, and JNJ. Also, did I mention I’m not a financial professional and that this article in no way should be taken as financial advice? Pretty sure I did, but there it is again, just in case.
















  1. First of all I think your process what great, especially for a beginner. It’s always good to start with companies that you are familiar with. That way when you get into more research you will understand their business. And it’s always good to buy into dips. Obviously no one knows when the market will correct back into positive territory but I also bought after the plunge. I just picked up more of the stocks I already own. That brings my average cost down and will increase my return once the market comes back. And it will eventually, just not sure when. Let me know how things go!

  2. With the recent uncertainty in the market this is a very good idea. I typically only invest in dividend paying stocks, it helps me sleep better at night. I also invest in JNJ, check out ADP as well…I love companies that consistently increase their dividend payout year over year.

  3. I love dividend stocks. As I am a long term investor, if the stock isn’t working for me to some degree in the meantime I am not interested in it. Someday I would like to live off my earnings, but until then I am content in knowing that my investments are earning me a little extra each quarter.

  4. I agree, Denise. As long-term investors, the wait for a payoff can be such a long one. Dividends can give you a nice little reward along the way.

    I hope you meet your goal of living off earnings. That would be great, wouldn’t it?

  5. This is fantastic. I am starting to learn more at this point. I am a little nervous, but once I get a little more comfortable I think I may take the plunge in this direction too.

    Looking forward to the updates.

    1. I’m sure it will head back up, Freddie. The question is when. That’s what’s good about being a long-term investor, though. No need to sweat the short-term swings.

    1. That’s what I’m hoping, Hunter. I love that the Aristocrat list doesn’t focus on who has the highest dividends, but who has been the most consistent. I like that approach.

  6. Julie:

    I love the fact that the very first post I’ve ever read on your site is this one… I feel right at home. You’ve got several excellent names there… and your idea of investing in stocks that pay a dividend is not uncommon amongst beginners.

    I would like to caution you against believing all the hype you’re going to encounter about the wonders of dividend stocks. Just because they pay a dividend does not guarantee you will not lose more money than the dividend pays. In other words, if a stock pays a 5% dividend over the course of the year, but you lose 10% in it’s share price, you’re further behind than if you had chosen a stock that does not pay a dividend but rises 5% over the course of the year.

    Anyway, I could go on for quite a while about this topic… as it’s my passion (investing in stocks). I suppose it will have to wait for a different venue. Best to you… let me know if I can assist you in any way.

    1. Thanks for your comment, Doctor. Good points. I guess in an ideal world you wouldn’t have to choose between increases in share prices and dividends. Unfortunately, this investing world is anything but ideal…especially at the moment.

      Hope you visit again.

      1. True… ideally. And there are those opportunities… as long as investors don’t “hang on” just because of the promise of a dividend when the stock price is falling. There’s no need to do so and it will erode their capital.

  7. Congrats. I’ve been investing in equity stocks (both dividend and growth) for the past 2 decades. Once mistake I made was to buy all at once. Dollar cost averaging (buy some stock every month, or every year or every week, etc) lets you get a good accumulation and you don’t worry about whether you are at the top or the bottom of the price.

    1. Good point, Marie. I love dollar cost averaging. I probably would have been better off to DCA these investments. Honestly, it didn’t occur to me at the time. Thanks for the reminder.

  8. Hi Julie!

    Wow- I’m impressed that you’re taking the plunge into the stock market with ease and emotional control (or, at least it sounds like it!)

    Have you read “The Intelligent Investor” by Benjamin Graham? It’s a little chunky, but goes over some cool dividend and stock selection theories.

    I’ve always been interested in dividends myself, but my attention was always whisked away by “exciting” investments like volatile tech stocks, options, etc. After reading Graham’s book, it made me want to invest in dividend paying stocks! Definitely a good read.

    Best of luck with your investments!

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