Dividend Investing: Long Term vs. Short Term

On 2011/06/20, in Blog, by Miranda Marquit

In many cases, your investing strategy will depend on your time frame. The same is true of dividend investing. When investing in dividend stocks, you will need to consider your goals, and what you hope to accomplish with your dividend stocks. While dividend paying stocks can be good for a long term portfolio, as well as for a short term portfolio, the way you invest to get the best benefit will be different.

Long Term Dividend Investing

When it comes to long term investing, you don’t need a large amount of capital to start; dollar cost averaging works well. The important thing is to be consistent, regularly investing money. For long term dividend investing, it is also a good idea to take advantage of DRIPs. These plans will automatically reinvest your dividends so that you buy more shares of the stock. You essentially get these shares for free. These can grow your portfolio, helping you when it comes time to sell later on, for retirement or college or some other goal. You will have more shares, presumably at higher values.

If you want to use the investments for retirement, you can hold them in a tax-advantaged retirement account. That way you can avoid paying taxes on your dividend earnings until you withdraw from the account.

Short Term Dividend Investing

If you want to use the money in the short term, such as building up an income stream from dividend payments, you need to take a little different approach. If you want immediate income, you will need have a large chunk of cash to start. A large amount of capital is required to generate the payments that can result in immediate income.

However, if you have time to build up to an income stream, you can create a plan to build up your dividend portfolio. If you are looking to be able to have a good income stream in seven to 10 years, you can use a strategy similar to dollar cost averaging to build your portfolio over time. You will see your income stream from dividends grow. You can use DRIPs at the beginning to get more shares faster. As you get closer to when you expect to take advantage of your dividend income stream, you can stop using the DRIP strategy, and enjoy the advantages of having more shares – and larger dividend payments.

Dividend stocks can offer a number of opportunities for diverse time frames. Consider your goals, and carefully plan a strategy that can help you take best advantage of dividend stocks.


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