Young investors rarely get involved in investing in individual stocks for a number of reasons. Whether it is a lack of money available to invest or the inability to navigate the stock market due to a lack of experience and knowledge, it can be difficult to start investing.
With that said, starting while young can be very fruitful in many ways. Obviously, your money has more time to grow, but even more, learning how to invest takes years and the experience gained from starting early can be very lucrative.
I believe dividend stocks are a great area to focus on for new and young investors because they tend to be less volatile, provide a slight buffer against loss because of the dividend, and most importantly, because the philosophy of investing in such stocks tends to be a more conservative long-term approach rather than trading for a quick buck.
Here are five tips for young investors to assist in the process of starting a portfolio of dividend stocks.
#1 - View Stocks As Ownership In Companies
Too few investors view investing more as trading pieces of paper, speculating that they can turn a quick profit. It's more similar to playing the lottery than buying stakes in companies. When you invest, that is exactly what you're doing. You are buying ownership in a company.
As such, you should approach investing entirely this way. Is the company one you want to own? Do you believe in the management, the product, the culture? Do you want to own this company for many years? How do you know?
#2 - Focus On Dividend Stocks That Increase Dividends Each Year
Find companies that pay a dividend and increase it each year. Your goal should be to accumulate a massive income stream versus massive share price appreciation. Cash flowing dividends will pay you more and more over time versus a one-time quick buck made.
Focusing on income goes hand-in-hand with viewing stocks as ownership in a company. You buy a company you own because you want to share in its cash flow from here on out.
#3 - Focus On Building Positions Over Time
Young investors will likely not be able to buy massive positions due to a lack of available capital. This shouldn't discourage you from building positions continuously over time.
Dividend Reinvestment Plans (DRIPs) can be excellent vehicles for those getting started with dividend stocks as it allows you to contribute money each month and automatically reinvest dividends to focus on building positions. You can read more about DRIPs here.
#4 - Target Companies That Produce A Product Likely To Remain In Demand 20-30 Years From Now
As you identify companies to buy into, consider whether or not the product/service they produce and sell will still be viable in a few decades. Since we want to build positions over time, this is a crucial thing to consider.
It can often be difficult to know whether or not technology companies will be viable in a few decades, plus tech companies rarely pay dividends, so they may not generally be the best choices. Consider consumer staples stocks, energy stocks, for example.
#5 - Get To Know A Few Companies Very Well
Another mistake many investors make is that they get a stock tip and sell a stock they loved just a week prior in order to buy into this new stock. You should really keep your focus on just a few stocks and get to know them very, very well. You might start with companies that you are already somewhat familiar with particularly since they produce a product you actually buy.
Not only will you be able to judge the worth of investing in such a company, but it will teach you how to find companies and know what to look for - a crucial long term skill in your life as an investor.
Visit My Dividend Stocks to get more detail on dividend investing filtered through the lens of a select few companies.