How to make stock dividends work for you

An additional income is always an attractive idea – and there’s always something to save for, whether retirement, a home or even members of your family. And one way you could generate an income is through investing in stocks, writes Sabuhi Gard.

Where do you start?

Do your research

Before investing in a stock it is important to do your research into the performance of a company and its sector. You can improve your knowledge by reading the business sections of national newspapers, specialist magazines and investment articles on low-cost dealing platforms like AJ Bell Youinvest’s.

Online tools

Many low-cost dealing platforms can also give you access to online research tools for free, so you can research the stocks which have decreased in price the most, or increased the most in price on the day; or read about which stock or stocks pay the highest dividend.

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Seek advice

If you still feel uncertain about investing in stocks after carrying out your own research you can ask advice from a professional financial adviser.

What is a dividend?

A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments or as shares of stock* (Investopedia).

Picking a stock which pays its stockholder an adequate dividend is vital for an investor who wants generate an income. Dividends are usually paid quarterly to stock holders on specific dates, and depending on the company the dividend can be high or low in value.

Dividend-paying stocks have the ability to increase in value but they may not have the same growth potential as growth stocks.

What do you need to look out for if you are going to invest in stocks for income?

First of all, you have to consider your investment’s yield. The yield is an investment’s pay out expressed as a percentage of the investment amount. Looking at the yield is a way to compare the income you expect to receive from one investment with the expected income from others.

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Setting up a dealing account

Once you have carried out all your research from the sources available to you, you can open an online dealing account, or a traditional dealing account over the phone via a stock broker to buy and sell your stocks.

Be warned, there are many traditional stock brokers and online brokers that offer this service. Look for accounts which offer little or no account charges, low dealing costs and the ability to withdraw money when you want to. You don’t want to be spending more money on fees and charges then you are actually generating in income.

There is a degree of risk involved in trying to generate income from stocks: the value of stocks and go up as well as down, so always be well-informed when taking on any form of financial investment.

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Please note the value of investments, and any income from them can go down as well as up and you may not get back your original investment. AJ Bell Youinvest do not offer advice about the suitability of their products or any investments held within them. Should you require financial advice you should consult a suitably qualified financial adviser. Tax rules can change in the future and the tax treatment depends on your personal circumstances. Past performance is not a guide to future performance and some investments need to be held for the long term.

AJ Bell is authorised and regulated by the Financial Conduct Authority. The Independent is not responsible for the content of this advertisement feature and any queries should be directed to AJ Bell.