3.) Reinvest, Unless you are currently in need of utilizing your dividend income, it is vital that you re-invest your dividends. You can create an amazing compounding effect over time by investing in solid, dividend-paying companies and reinvesting the dividends. Dividend reinvestment can be accomplished by reinvesting each dividend received directly into the company that paid the dividend, or by allowing your dividend funds to accumulate over a period of time and investing them all at once. During periods when the stock market is down, dividend reinvestment can allow you to automatically purchase shares at bargain prices. Patient, successful, long term investors can eventually end up multiplying the number of shares owned many times over by dividend reinvestment, creating an impressive snowball effect.
4.) Manage. Effective portfolio management includes deciding what percentage of your portfolio to allocate to each sector, how many stocks you would like to include in each sector, the maximum percentage of your portfolio to devote to any one stock, and when to sell. My personal rules are to not exceed 20% of my total portfolio in any one sector and to not exceed 5% of my total porfolio in any one stock. However, each investor has a unique style and these percentages may vary greatly from investor to investor. Also, buy each stock incrementally instead of all at once. This will allow you to add to your position if the share price drops significantly provided that the original investment thesis remains valid.
I strongly recommend that you invest regularly over time, regardless of whether the market is up or down. Since I started investing in 2002, the Dow has been on a wild ride dropping quickly from 10,500 to below 7500, followed by a steady increase to all-time highs of over 14,000 in 2007, followed by the crash during the great recession to below 7000, followed by the recent run back near the all-time high reached in 2007. Throughout this volatile period I continued investing in the best dividend paying stocks on a monthly basis. This allowed me to purchase some of my favorite dividend stocks at bargain prices, especially when the market was at the bottom. However, if I would have gone all in by investing a large amount of money initially in 2002, I would have missed two of the greatest buying opportunities in decades.
5.) FUN. Investing in stocks requires some time to research stocks and manage your portfolio, but it is time well spent in my opinion. Watching your dividend paying stocks compound over the years is fun. I enjoy investing in dividend stocks and consider it a hobby as well as a vehicle to provide money for the future when me and my family will need it the most. Have fun and good luck!
The article Develop Your Own Successful Dividend Portfolio originally appeared on Fool.com and is written by Greg W.
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