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Stock Dividend Investing Can Create Long Term Growth

|Includes: Great Elm Capital Corp (GECC)

In nearly every investment book and television production there is a key term presented that investors are always looking to do and that is to "diversify their portfolio." Investors will often diversify within the eight sectors of stocks, bonds, ETFs, REITs, bonds, mutual funds, commodities and other investutures to limit their risk. One of the best ways to limit your risk when purchasing stocks is to invest in a stock with a dividend that has a strong history of paying the dividend.

For our purposes ETFs that offer dividends such as the Global X SuperDividend ETF (NYSEARCA:SDIV), that has been advertised ad nausea recently, will not be considered. Our purposes will solely look at stocks that offer dividends.

Before participating in any investing consider three main points: (1) you should have extra income to invest, (2) you should research any company you are considering investing in [read a company's annual report as Warren Buffett often suggests], and (3) you need to understand where information is coming from. You should not be investing if you have no savings and are in debt. Knowing about a company is an easy way to decide whether or not you want to be invested in a company or not. If you don't believe in the company's business model you should not invest. If you don't understand a business you should not invest. It is often a wiser strategy to invest in an established stock rather than an IPO as a result of available data. You also need to be able to determine how helpful the data presented is to you. For example, a variety of CNBC programs will discuss a wide range of stocks on a day-to-day basis, but only on some of these broadcasts is there transparency where you are told the individual [or their firm] owns the specific stock they're discussing, telling you to sell or telling you to buy. Considering any benefits an analyst gains from your action is a necessity.

Now that you have an understanding of how to research and react it is time to consider how to add dividend stocks to your portfolio. Do you want a monthly dividend stock such as the Full Circe Capital Corporation (FULL) as I own that offers a monthly dividend of about 7 cents? Do you want a quarterly dividend stock like Dunkin' Brands Group, Inc. (NASDAQ:DNKN)? Do you want a yearly dividend stock like Cigna Corp. (NYSE:CI)? Or do you want a mix of these dividend stocks? There are also stocks that pay dividends on a semi-annual basis, an irregular basis and offer special dividends. Ideally you want to have a mix of stocks offering dividends so that you are earning through this venture as often as possible.

I'm a fan of FULL because the stock is usually in a range between $3 and $4 per share. The dividend yield is very high. You will receive a monthly dividend per share and the total in dividends per annum at current rates is $0.80 per share. This means for 1,000 shares you're earning $800. For 10,000 shares you're earning $8,000. For 100,000 shares you're earning $80,000.

In theory purchasing cheaper stocks with a high dividend yield gives you a quicker rate of return. For the FULL example purchasing 1,000 stocks would cost you $3,500 based on current figures, plus whatever your transaction fee happens to be. Assuming a purchase prior to the start of 2016 you'd receive a return of $800 in 2016 if all dividends are paid. If you hold your shares in 2016, 2017, 2018, 2019 and 2020 you will have earned more in dividends than your original investment [assuming all dividends are paid]. You can choose to reinvest the earnings from your dividends into the same stock or in another dividend granting stock.

In your research phase you should use websites like Nasdaq.com and Dividend.com to view the frequency of a stocks' dividend and the strength in how often they've paid out a dividend. You can even screen stocks based on dividend criteria. You can also use stock simulation tools like Wall Street Survivor to test your strategies before using your own money.

In some instances individuals report earning dividend income on a daily basis, such as Daily Dividends. Modifying your portfolio for dividend granting stocks can produce long term growth in this way, as you're theoretically earning something every day. Proceed with caution based on your financial situation. For some long term financial growth will be easier due to having a strong current cash flow. Taking your time and building your growth will be beneficial in the long term.

Go with strategies you're comfortable with, but be flexible. You shouldn't keep a dividend stock if the dividend has been cut unless you strongly believe in the company and its growth.

Finally, do not sell a stock the day a dividend is granted, as the stock price falls to take this into account. If re-investing these would be the days you should consider purchasing more stock.

Long term financial growth is what we're all looking for. Using these ideas to determine where to go to limit risk through dividend stocks will be beneficial to your portfolio and potentially to your future.

Disclosure: The author is long FULL.