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How to invest in dividend stocks

Woman looking at online stock investments on mobile app
wera Rodsawang/Getty Images

Are you looking for a way to grow your investment assets over time, or are you seeking current income? Sometimes you can accomplish both goals with one investment. Dividend stocks are versatile investment securities that can combine long-term growth potential and income from dividends.

Before you decide whether this choice is right for your investment strategy, read on to learn how to invest in dividend stocks, how to identify a good dividend yield, how dividends are taxed and what else you may need to know before buying.

What are dividend stocks?

Dividend stocks are equity securities that represent ownership in a publicly traded company that pays dividends to its shareholders. Not only do dividend stocks provide income in the form of dividends, but they also provide investors with capital appreciation over time.

While dividend stocks can fluctuate in value like other equity investment types, they tend to be less volatile than their aggressive growth counterparts. This is because companies that pay dividends tend to be large, well-established corporations. As a result, dividend stocks can be a good way to add stability to your portfolio.

Why do some stocks pay dividends?

Some companies pay dividends while others don't. The primary reason stocks pay dividends is that the issuing company wants to share profits with its shareholders. Companies that don't pay dividends are either not profitable or choose to retain their earnings to later reinvest for future growth.

Publicly traded companies may also pay dividends to attract investors looking for reliable income. Dividends can be especially attractive to investors during negative market conditions, when price stability and dividend payouts may become priorities.

If you want to know how to tell if a stock pays dividends, most publicly traded companies have investor information on their websites. You may also find dividend and yield information on financial news sites and apps, from the Securities and Exchange Commission, or through the broker or financial institution where you hold your investments.

What's a good dividend yield?

To find out how much a company pays in dividends, look at the dividend yield, which is the percentage of a company's share price that it pays out in dividends each year.

In general, a good dividend yield can be measured by the average yield, which is usually in the 2% to 4% range. But a good dividend yield isn't necessarily the highest one you can find.

When do dividends get paid?

Dividends generally get paid on a quarterly basis, or four times per year. The last day of each calendar quarter is March 31, June 30, Sept. 30 and Dec. 31, so dividends are typically paid around these dates. There are exceptions to this general rule because a company's board of directors may decide the timing and amount of dividends to be paid.

When investing in dividend stocks, keep in mind three important dates:

  • The record date, which is the date you must own shares of a stock to be entitled to the company's dividend.
  • The ex-dividend date, which is usually set a day before the record date. If you purchase a stock on its ex-dividend date or after, you don't receive the dividend. Instead, the seller of the stock receives the dividend.
  • The payment date, which is the date a company makes the dividend payment to shareholders.

How are stock dividends taxed?

How dividends are taxed depends on how they're classified, which may be one of two ways: ordinary or qualified. Ordinary dividends are taxed as ordinary income with rates between 10% and 37%. Fortunately, most dividend stocks pay qualified dividends, which are taxed at a much lower rate of 0% to 20%, depending on your tax bracket.

For tax reporting purposes, your broker or the financial institution that holds your investment account reports your dividends to you every year on Form 1099-DIV. If you hold dividend stocks in a tax-advantaged retirement plan, such as an individual retirement account (IRA) or a 401(k), you don't owe taxes on dividends every year, as you would in a taxable brokerage account.

How can you buy dividend stocks?

To buy dividend stocks, you can build your own portfolio of individual stocks that pay dividends, or you can buy a mutual fund or exchange-traded fund (ETF) with its own dividend strategy.

Individual stocks

You can pick your own dividend stocks and hold them in your brokerage account or IRA. By taking this approach, you can research, select, buy and monitor the performance of your own portfolio of dividend stocks.

Mutual funds

With a mutual fund, you get a preset, professionally managed portfolio of securities. Some mutual funds specialize in dividend stocks or strategies. You can buy a mutual fund directly from a mutual fund company or through a brokerage. Some 401(k) plans offer mutual funds that hold dividend stocks.


Similar to mutual funds, ETFs are pooled investments that hold a range of securities in one packaged security. Unlike mutual funds, ETFs trade on an exchange like stocks. ETFs also tend to have lower expenses than mutual funds, and they may track an underlying benchmark, such as an index of dividend stocks.

What are common dividend investing strategies?

Whether you build your own portfolio of dividend stocks or buy mutual funds or ETFs that hold dividend-paying stocks, you can choose from a variety of dividend investing strategies. For example, you may want to hold stocks of companies that have a history of increasing dividends, or you may aim for high-yielding stocks.

Here are four common dividend investing strategies:

Income vs. reinvesting dividends

A key decision to make when investing in dividends is whether you want the dividends paid to you or if you want to reinvest the dividends. Generally, if you want income, you can have the dividends paid to a cash account for withdrawal later or sent to you by check. If you want growth, you can have the dividends reinvested, which means the dividends buy more shares of the stock.

Dividend growth strategy

Also called dividend appreciation, a dividend growth strategy focuses on buying stocks that have the ability and the commitment to grow their dividends over time. You can look at a company's history to determine if it has consistently grown its dividends. Mutual funds and ETFs may also use this strategy by actively selecting the dividend stocks to buy or investing in the holdings of a dividend stock index.

High dividend income strategy

A high dividend investing strategy typically focuses on buying stocks that consistently pay above-average dividends. Keep in mind that the highest dividends don't necessarily indicate the highest-quality stocks. In fact, a high yield can indicate that a company is in distress and attempting to attract more capital from investors hungry for high dividends.

When researching and buying high-yielding dividend stocks, you should use caution not to seek the highest yields but to find yields that meet your investing goals. The same caution applies when choosing high-yield mutual funds and ETFs.

Real estate income

You might choose to invest in real estate investment trusts (REITs) for income. REITs are companies that own income-producing real estate, such as hotels, apartments, health care properties or residential properties. You can buy individual REITs or buy a mutual fund or ETF that invests in REITs.

Because of their legal structure, REITS are required to return a minimum of 90% of income in the form of dividends to shareholders each year. However, like other equity and high-yielding investments, REITs still carry risk.

Are dividend stocks worth it?

Buying and holding dividend stocks can be worth the investment if you know what to look for and how to choose what's best for your portfolio strategy. While dividend stocks can provide income and steady returns over the long term, there's still market risk, which means prices may decline in the short term during adverse economic conditions.

Whether you want to build a portfolio of individual dividend stocks or buy a mutual fund or ETF with a dividend stock strategy, it can be wise to discuss your options with your local Thrivent financial advisor who can help guide you in your investment strategy and goals.

Investing involves risk, including the possible loss of principal. The ETF, mutual fund or REIT prospectus will contain more information on investment objectives, risks, charges and expenses.  The investment prospectus should be read carefully prior to investing.

Past performance is not necessarily indicative of future results.

Dividends are not guaranteed.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.