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This Is How Dividend Investing Can Help You Become Wealthy

Dividend Investing is another passive investment strategy that investors use to accumulate a steady, regular income. There is a little more risk involved than holding index funds or ETF's, but if you buy the right shares this can be a great way to generate long term wealth.

In this article, I will go over the basics of what Dividend Investing is, and how it can help you build a strong, profitable portfolio.

What Is Dividend Investing?

Dividend Investing is simply buying shares that pay out a dividend to shareholders on a regular basis (monthly, quarterly, bi-annually or annually).

A dividend is a portion of the company's profit which is paid back to shareholders, as a thank you for letting them use your cash. The amount of dividend you receive depends on the dividend yield of the share you own.

For example, if a share is worth £1, and the dividend yield is 2%, you will receive 2p per share for owning it. So if you own 100 shares worth £1 each, your dividend pay-out would be £2 per year.

Dividends are usually paid quarterly or annually. In rare cases, companies pay dividends monthly.

Nowadays it's also possible to buy fractional shares. This means if you can't afford a share you are still able to buy a fraction of it. As an example a share in Amazon is worth about $3000 at the time of writing, however if you only have $300 to invest, you can still buy 0.1 of the Amazon share and reap returns from Amazons future growth!

This wasn't possible years ago, so you can understand why investing has become so much more accessible for people like you and I!

It should be noted that if a company is struggling financially, they may decide to not pay out a dividend, even if they have been paying a dividend regularly in previous years. So that's something to keep an eye on. (Some companies refused to pay out a dividend during the peak of the Covid-19 pandemic).

How Can Dividend Investing Help Build Long Term Wealth?

Dividend investing is a long-term strategy. Most investors buy dividend-paying shares to provide a source of passive income.

What's great about dividend investing is you can approach it in two different ways. You can either take the dividend income that you earn out of your portfolio and use it to supplement your salary. Or you can reinvest it back into the portfolio, using the dividend income to buy more shares. Using the latter method will help grow your investments even quicker and is the method I use and would highly recommend!

As an example, if you had a £10,000 portfolio that had an average dividend yield of 2%, you'd be paid £200 a year in dividends tax free...for doing nothing!

There are brokers that reinvest your dividends automatically, such as the broker I use which is Trading212.

What Are The Risks of Dividend Investing?

As you are buying stocks on the stock market, their prices will obviously fluctuate, which could effect the level of dividends you will receive. Just because you received 5p per share last year doesn't mean you will receive that this year (it could go up or down!) And of course, companies you invest in could go bust.

There is also the danger of companies deciding not to pay out dividends due to poor performance, so you will need to keep a watch on the companies you invest in (you can check the news if you're not comfortable with looking at financial statements, sentiment is a big part of investing).

Also keep in mind that just because a company is paying a high yield right now doesn't mean they will keep doing so in future (and normally, high yields are not sustainable). It is easy to get drawn in by a high yield stock, but you should be wary of them. It's also worth noting that some industries tend to pay higher dividend yields due to the nature of their business.

For example, Healthcare companies offer traditionally low dividend yields of around 2% on average, whereas Financial companies offer about 4%.

Tax Implications of Dividend Investing

If you hold your investments in a S&S ISA then you will not have to pay tax on your dividend earnings.

Also, everybody in the UK gets a £2,000 dividend allowance each year irrespective of where investments are held.

If your investments are held outside of an ISA, you will have to pay tax on dividend earnings over £2,000.

The amount of tax depends on which tax band you are in, here are the percentages below...

Basic rate (taxable earnings between £12,571 and £50,270): 7.5%

Higher rate (between £50,271 and £150,000) 32.5%

Additional rate (over £150,000) 38.1%

Please note this is taxable income, not your full income. The personal allowance for taxable income is £12,570, so take that number away from your annual salary to work out your taxable income.

How Dividend Investing Can Help You Become Wealthy

Income from dividends is a passive income stream, and the more money you have in dividend stocks, the more income you will receive!

Owning Dividend Stocks for the long term is a great way to become wealthy because if re-invested, your investments will compound over time (without even factoring in the compound effect of your stocks growth!). This produces massive gains over decades!

This enables investors to build big portfolios which in turn pays out bigger dividends to you, the shareholder!

To illustrate, a £1M Dividend Portfolio that pays out 3% a year in dividends is £30,000 a year...which is just below the UK average salary!

Obviously it takes a long time to build such a portfolio, but it is a great way to build wealth and ensure that in your twilight years, you can live off of your investment income.

This article is for educational purposes only. This is not investment advice and you should seek guidance from a financial/investment advisor if you are unsure of where to place your investments.

If this article helped you understand Dividend Investing better, please consider supporting the website by buying me a coffee on Ko-Fi. All coffee's will be reinvested back into the website and not consumed on a 7am train to London Bridge.


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