Getting Started with Dividends

So how do you get started with dividends?

Step one: Set up a brokerage account. Some people like TD Ameritrade, E-Trade, Schwab, Fidelity, etc. Some people swear by Robin Hood, which offers free trades, but can be a bit laggy. I use Scottrade.

If you don't have an IRA yet, do that first! An IRA can be a brokerage account, but is a special kind that gets gentler treatment from the IRS. The tax benefits really add up! Don't know about them? Here's IRAs Explained like you're 5 Years Old.

Step two: Put some money in your brokerage account.

Step three: Find a dividend stock you like and buy some!

When you understand how powerful compound interest is, you'll know that when you use your dividends to buy more dividend stocks, it can create a snowball effect that can eventually replace your paycheck.

Watch out for commissions!

If you use an account like Schwab or Etrade that charges a commission every time you buy stocks, make sure that you buy in big enough batches. This will ensure that you don't lose a big percentage of your dividends to fees. When I first started out, I bought in batches of $500 at a time. With a $7 commission, that's a 1.4% drag. Not the worst, but not great either. For a 3% dividend stock like General Mills, I would lose the first half-year's dividends to the commission.

These days, I know better. I wait until I have at least $1000 before I buy a dividend stock- usually I am patient enough to wait until I have saved $2000.  Since the commission remains flat, I can bring down my percentage lost to fees the more I buy at a time.

It's easier to sock away more at once when you've been investing for a while, because while you are saving up for your next dividend purchase, the stocks you already bought are busily generating cash.

Don't use a market order!

 When you're ready to buy, be careful of the kind of order you make. People who are using Robin Hood have complained that they tried to buy a stock at one price, and the order went through at a higher price!

There are different kinds of orders you can make. You can usually find them in a drop down menu when you are making your stock purchase. I'll write about them later, but for now, check out this reddit post and this post on a forum about market orders.

Don't be tempted to sell during a crash!

Imagine that a dividend stock is like a chicken which lays eggs made of cash. The chicken gets fatter and thinner - that is, the stock price goes up and down - but as long as it is able to lay eggs, there is no reason to kill the chicken by selling off the stock!

The truth is, a crash is the worst time to sell. The market will always go up and down.

*None of this is investment advice. All investing involves risk and investments may lose value, so do your due diligence before getting started!

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