Investing Assets & Markets Stocks How to Get Dividend Income By Joshua Kennon Joshua Kennon Twitter Website Joshua Kennon is an expert on investing, assets and markets, and retirement planning. He is the managing director and co-founder of Kennon-Green & Co., an asset management firm. learn about our editorial policies Updated on April 26, 2022 Reviewed by Ebony J. Howard Reviewed by Ebony J. Howard Ebony Howard is a certified public accountant and a QuickBooks ProAdvisor tax expert. She has been in the accounting, audit, and tax profession for more than 13 years, working with individuals and a variety of companies in the health care, banking, and accounting industries. learn about our financial review board Fact checked by Ariana Chávez Fact checked by Ariana Chávez Ariana Chávez has over a decade of professional experience in research, editing, and writing. She has spent time working in academia and digital publishing, specifically with content related to U.S. socioeconomic history and personal finance among other topics. She leverages this background as a fact checker for The Balance to ensure that facts cited in articles are accurate and appropriately sourced. learn about our editorial policies Share Tweet Pin Email In This Article View All In This Article What Is a Dividend? Why Use Dividends for Income? An Example of Dividend Investing Important Things to Consider Frequently Asked Questions (FAQs) Photo: d3sign / Getty Images You must find companies that are likely to increase their dividend payments year after year if you're going to make money through dividend investing. You cause more money to flow into your bank account when you do that. As the firm's sales and profits grow, so will your dividend income. Making money from dividend-paying stocks is one of the basics of good investing. But you need to know what dividends are and how they work if you want to put them to good use. Learn how these kinds of stocks add a stream of income to your accounts. What Is a Dividend? A companies funds dividend payments when it earns a profit. It uses part of these profits to send money to the people who invested in them. The board of directors meets to listen to company leaders, who suggest how much of the profit should be set aside for growth. A portion of what's left is then paid out to shareholders as dividends. Note The board of directors also considers how much profit should be used to pay down debt and how much should be used to buy back stock. Why Use Dividends for Income? Your dividends can be reinvested. You can also use them to pay household bills, to send a child to college, to start a business, pay for vacations, or give to charity. The more shares you own of good dividend stocks, the more money you can make. Dividend investors collect this specific type of investment over time. Your net worth and income will keep growing as time goes on if you invest well. Note You could earn a large amount of money each year just from dividends alone if you invest over 30, 40, or 50 years or more. An Example of Dividend Investing Suppose Anthony is 18 years old and he's just gotten a job. He decides that he wants to start making money from stocks, so he begins to invest. He chooses shares of big blue chip firms. He looks for ones that show healthy growth, strong balance sheets, and a solid history of raising the dividends it pays out over time. He wants to avoid taxes, so he opens a Roth IRA to hold these stocks. Anthony can add up to $6,000 to this account each year because he's younger than age 50 and that's the limit set by the IRS as of 2022. This move gives him a great edge in tax planning because he'll never pay a penny in taxes on the gains he makes in this account as long as he follows Roth IRA rules. Contributions are made with after-tax dollars and they can't be deducted from income, so any money he takes out will be tax-free after five years. Anthony is able to grow his money at 8% for the next 50 years. Thanks to compound interest, his portfolio grows to more than $3 million by the time he reaches 68 years old and decides to retire. He could collect about $96,000 in dividends each year if he invested wisely and picked stocks with an average dividend yield of at least 3%. That's cash in his pocket. And he doesn't have to pay any taxes on this income because he holds the stocks within his Roth IRA account. Important Things to Consider Making money from dividend stocks involves a handful of key factors: The dividend yield that a stock offers at the time you buy it The rate of growth in the company's profit, which can be used to project future dividend increases The health of the company's balance sheet Current dividend tax laws The net investment income tax went into effect in 2013. This tax collects 3.8% from your net earnings, depending on how much you earn and your filing status. It applies to those who make more than $200,000 a year and who are filing single or head of household, or more than $250,000 a year if married filing jointly (if married, filing separately, the income threshold is $125,000). That could affect your bottom line if the threshold applies. Picking a firm with tons of debt and falling sales is always a big risk, no matter how large the payout may appear. You might instead look at a low-cost index fund that's focused on dividend-paying companies. An index fund is an exchange-traded fund (ETF) or mutual fund that tracks a certain market index. You don't have to select each stock on your own with this option, but you can still try making money with dividend investing. Note One such index is the S&P 500 Dividend Aristocrats Index. It tracks large, high-quality, blue chip stocks in the S&P 500 that have raised their dividend every year for the past 25 years. You can also take a look at dividend-focused ETFs, such as the iShares Select Dividend ETF or the Vanguard Dividend Appreciation ETF. Be sure to read the mutual fund prospectus before you invest. This tells you how the stocks held in the fund are chosen. It will help you decide whether the risks are right for your situation. Frequently Asked Questions (FAQs) How often are dividends paid? Most companies pay dividends on a quarterly basis, but some may choose to pay monthly, annually, or even semiannually. You can check a company's investor relations page to find out when it pays dividends. How do I calculate dividends? Dividends are paid on a per-share basis. Multiply the dividend by the number of shares you own to calculate your expected payout. For example, you would receive a $29 dividend payment if you own 10 shares in a company that pays $2.90 per share in dividends. How do I know what stocks pay dividends? A company's investor relations page, along with its information on its listing exchange (the Nasdaq, NYSE, etc.) will include information about dividends. You should generally look at larger, more well-established companies if you want stocks that pay dividends. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Internal Revenue Service. "Retirement Topics - IRA Contribution Limits." Internal Revenue Service. “Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs).” Internal Revenue Service. "Roth IRAs." Internal Revenue Service. "Find Out if Net Investment Income Tax Applies to You." S&P Dow Jones Indices. "S&P 500 Dividend Aristocrats."