The passive income of dividend investing can be just the ticket for investors who need extra cash flow.
Maybe you're saving up for a down payment on a house or a new car. Or maybe you have a big but temporary recurring expense coming your way.
In my case, I needed a way to generate a little extra money every year to help cover my daughter's tuition at a private Catholic high school. High-yield dividend stocks solved my problem.
The plan is to let the dividends accumulate in my account throughout the year. When the tuition payment is due, I'll withdraw what I need to bridge the gap from what I've already saved.
Instead of having to eat into my savings, I hope to reach her graduation with more money in my investment account than I started with.
School tuition is the perfect example of how dividend investing – and in particular, high-yield dividend investing – can make a difference in your financial situation. You know that for several years, you'll need to make a large annual payment. But you also know you can't save enough to cover the total expense. And you don't want to withdraw any money from your investment account.
Dividend investing usually won't completely cover an anticipated expense, but it can make a major contribution. It all depends on how much you have to invest, how much you need, and how much risk you're willing to take.
In most ways high-yield dividend investing is like any other kind of investing, but there are some twists. Here are some tips to get the most from dividends.
Tips for High-Yield Dividend Investing
Research is the first step to finding ideal high-yield dividend stocks (with yield 5% or higher). Typically these investments carry more risk than others.
Ideally, you want to find stocks that pay the highest yields you can find, but aren't likely to see a steep price drop that will destroy your capital.
And where we're looking, the pool isn't terribly large. Fewer than 500 stocks pay a dividend of 5% or higher.
Most high-yield dividend stocks fall into one of four categories: utilities, real estate investment trusts (REITs), Master Limited Partnerships (MLPs), and Business Development Companies (BDCs).
All save the utilities are special kinds of stocks that require the payout of most, if not all, earnings in the form of dividends. That's why so many REITs, MLPs, and BDCs turn up in lists of high-yield dividend stocks.
And it typically means different tax treatment, usually favorable. But it's something to keep in mind.