Dividend investing is the strategy of buying stocks or funds that pay regular cash distributions to shareholders. While not a get-rich-quick scheme, it's a powerful way to build reliable passive income over time.
How Dividends Work Companies distribute a portion of profits to shareholders quarterly (sometimes monthly). Yield = Annual dividend / Stock price. A stock paying $4/year with a price of $100 has a 4% yield.
Dividend Aristocrats These are S&P 500 companies that have increased their dividend every year for 25+ consecutive years: Coca-Cola (52 years), Johnson & Johnson (61 years), Procter & Gamble (67 years). They tend to be stable, mature businesses.
Dividend ETFs vs Individual Stocks Beginners should start with dividend ETFs rather than picking individual dividend stocks: - VYM: Vanguard High Dividend Yield ETF (3.1% yield, 0.06% expense ratio) - SCHD: Schwab US Dividend Equity ETF (3.5% yield, 0.06% expense ratio) - DGRO: iShares Core Dividend Growth ETF (2.3% yield, 0.08% expense ratio)
The Power of Dividend Reinvestment Reinvesting dividends through a DRIP (Dividend Reinvestment Plan) compounds returns dramatically. $10,000 in SCHD over 20 years with reinvested dividends at 3.5% yield + 8% growth = approximately $58,000, vs $46,000 without reinvestment.
Red Flags Yields above 6-7% often signal a company in distress — the "dividend trap." A high yield paired with declining earnings usually means a dividend cut is coming, which crushes share price.