How to start dividend investing with little money — 7 key points for new dividend investors who are starting with a small sum of money to remember. I am not a licensed investment advisor and this post is not investment advice. This article may contain affiliate links.
Dividend investing is a predictable investment strategy that involves buying and holding blue chip stocks that pay dividends.
Although it’s not the fastest way to financial independence (it might be better to buy the S&P 500), it may be the surest and most predictable way to get there.
Based on how much money you can save, it’s easy to accurately predict when you would be able to retire off dividends.
The other advantage is that dividend investors don’t have to sell principle to live off. They just live off the income their stocks generate. And that means they keep the capital appreciation as well.
Best of all, dividend investing is accessible to almost everyone now that zero-commission brokerages exit.
In this article, I will look at how to start dividend investing with little money.
Let’s jump right in.
How To Start Dividend Investing With Little Money
How To Start Dividend Investing With Little Money
Open A Zero-Commission Brokerage Account
One of the main advantages dividend investors can have over mutual funds or other investment strategies is the ability to keep commission costs low.
You can either buy infrequently, if your brokerage charges a high commission, or buy frequently in a zero-commission brokerage.
By keeping your costs low, you are enhancing your total investment returns and getting the most out of the dividend income you are being paid.
Invest Tax Efficiently
In addition to keeping investment expenses as low as possible, make sure to invest tax efficiently.
Considering that you are starting with little money, you definitely do not want taxes eating into your investment returns.
So, find out what the most tax efficient type of investment account is for dividend investing.
In my case, the best two options in Canada are a TFSA and an RRSP.
Beyond saving the minimum amount in my RRSP to avoid paying tax, it makes the most sense to invest in my TFSA.
If my dividend stocks are invested in a TFSA or RRSP, I don’t have to pay tax on the dividends.
Invest Frequently To Stay Motivated And Build Wealth Fast
The best part about investing in a zero-commission brokerage is you can buy stocks frequently.
It’s so much easier to get into a profitable position with stocks if you can avoid paying commission.
Further, you can dollar cost average into high quality dividend stocks.
Rather than waiting until you have enough cash to cover the commission fee and stock, you can grow you stock positions one share at a time.
As dividends come in, you can reinvest them back into stocks without paying a commission.
I like this idea because I try to get my money out of fiat as quickly as possible with inflation as high as it is.
Dollar Cost Average Into High Quality Dividend Growth Stocks
When you have little money to work with, you want to find investments that are going to work for you.
You want to find stocks that offer consistent dividend growth.
To achieve consistent dividend growth while investing with little money, you can invest in high quality dividend growth stocks. There are stocks that raise dividends every year.
In turn, the little money you invested last year will generate more income each year.
This way, your dividend income will continue to grow without you having to invest as much money.
Reinvest Dividends
If you are in the wealth building stage, you absolutely must reinvest all dividend income.
You don’t want to be withdrawing your dividend income to make purchases.
Reinvesting dividends into more dividend stocks and then earning dividends on dividends is how dividend investing compounds wealth.
In short, reinvest all dividends until you are officially financially independent.
Remember To Track Total Returns As Well
Dividend investing such a simple strategy and dividend income is so tangible that it’s easy to forget the total investment return.
Essentially, you don’t want to just buy a stock because it pays a high dividend yield. For example, look at a stock like AT&T. The yield is high because the stock performance is so poor. That’s a stock that will pull down your total returns in the long run.
It would be better for your total returns to own a stock like Apple that pays a much lower dividend.
Remember to track your total investment returns as well as your dividend income.
Related post: How To Calculate Return Rate (ROR)
Diversify Your Portfolio (5% Per Position)
Another important part of dividend investing is diversification.
Simply put, if you only hold one stock and they cut their dividend, you lose 100% of your dividend income.
But if you hold 10 stocks and one of them cuts its dividend, you only lose 10% of your dividend income.
If you hold 20 equally weighted stocks and one them cuts its dividend, you only lose 5% of your dividend income.
Basically, the more stocks you own, the more diversified your portfolio is. It’s a way to mitigate risk.
However, be careful not to over diversify your portfolio. That will lead to lower total returns.
How To Start Dividend Investing With Little Money — Final Thoughts
Now you know how to start dividend investing with little money.
The main things to remember are opening a zero-commission brokerage account and investing tax efficiently.
When you are investing with little money, you want to try to keep as much of it as possible.
To get your money working for you, invest in high quality dividend growth stocks that raise dividends every year. In turn, your income will continue to grow without you having to invest more.
Moreover, reinvesting all dividends is another important point to remember. A dividend investing strategy works best when all dividends are reinvested for more than a decade.
Otherwise, maintain a long-term focus and be consistent with your strategy.
Similar Investing Articles To Check Out
Investing With Little Money – 6 Easy Steps To Invest In Stocks When You’re Starting From Nothing
What Is The Minimum Amount Of Money Needed To Invest In Stocks?
Is Buying Fractional Shares Worth It? 5 Undeniable Benefits
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Projecting Dividend Income Over 10, 15, and 20 Years
