Dividend investing is one of the most potent forms to quickly increase your monthly income and generate strong passive cash flow. But what if you don’t have a lot of spare capital lying around to invest?
In this post, I’ll cover how to get started with dividend investing with little money. Everyone – and I mean everyone – can scrape together a few dollars and start investing in dividend stocks thanks to an array of discount brokers available.
The sooner we start the habit of investing regularly, the more likely we will keep it up in the future when we eventually have a lot more extra capital.
How to start dividend investing with little money
Total Time: 1 day
Sign up with a broker
The first is to sign up with a broker. Ideally, we want to pick a discount broker that offers commission-free trades like M1 Finance. There also other options out there but in my opinion, M1 Finance offers the best platform for dividend investing.
Buy a dividend ETF
The next would be to buy a dividend ETF such as VIG, DGRO, or NOBL. These are index funds that are focused on holding securities that have all increased their dividend payout over a certain number of years, so they will likely continue to do so in the future.
Once you have completed all of the above it’s simply time to wait. Usually, dividends will be distributed every quarter. With most brokers you have the option to either automatically reinvest your earned dividends or simply have them added to your account balance. By reinvested your earned dividends you can generate a powerful compounding effect over the long term!
FYI: Another great way to get exposure to the real estate sector is by investing in real estate debt. Groundfloor offers fantastic short-term, high-yield bonds that can add diversification to your portfolio!
What is dividend investing?
Dividend investing is simply the process of investing in stocks and companies that have a history of increasing dividends. The distributed dividend can then either be paid out in cash or reinvested for a compounding effect. As dividend investors we expect the company to continue increasing their dividend payouts indefinitely.
Instead of investing in individual stocks, most dividend investors will pick an ETF that tracks a certain dividend growth index. One of the most well-known indices is the Dividend Aristocrat Index. This index is comprised of companies that have continuously increased their dividends for more than 25 years.
The list is lead by American States Water with a dividend growth history of 65 years:
Exchange-traded funds that follow a dividend growth index are:
- ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
- iShares Core Dividend Growth ETF (DGRO)
- VIG – Vanguard Dividend Appreciation ETF (VIG)
(Read: DGRO vs. VIG – Which ETF Is Better?)
FYI: The best way I've found to invest is through M1 Finance. It's free and you even get an instant line of credit and 100$! Have a look here (link to M1 Finance).
Dividend investing with little money
It is a misnomer that you need large sums of money to get started with dividend investing. Sure, to actually make a full-time passive income and life off of dividends you need a lot of investment capital. But to get started all you need is an internet connection and some spare change.
In the following sections, I’ll go over a couple of options you have for getting started. But first let’s look at how much money you actually need.
How much money do you need for dividend investing?
The cheapest price per share for any company that is part of the dividend aristocrats is Tanger Factory Outlet (SKT) which currently trades at $7.88. That’s right, you only need $7.88 to get started with dividend investing. Well, at least to get started!
However, investing in individual companies is not something I would generally recommend. At least not unless you are Warren Buffet wannabe and are willing to study balance sheets for 10 hours a day.
The far more convenient and practical way for anyone nowadays to become a dividend investor is to harness the power of ETFs. Not only do ETFs provide excellent diversification by holding a multitude of different stocks, but they also do so at very low fees between 0.03-0.08% per year.
So, let’s have a look at the funds above: NOBL, DGRO, and VIG. Out of these three funds, the cheapest currently is DGRO at around $40.
So, realistically, all you need to start dividend investing is $40.
How do I start investing with little money?
Let’s go through this step by step!
Now, that we have seen just how little money you actually need to get started it’s time to pick the right broker. If you start investing in dividend stocks with little money, commission and fees at traditional brokers will eat up your profits straight away.
Instead, let’s have a look at some of the more modern commission-free brokers out there. My two favorites for getting started investing in dividend stocks are M1 Finance and Acorns.
M1 Finance is like no other brokerage platform out there. Not only do they offer commission-free trades (much like Robinhood), but they have combined the discount trading model with a professional platform aimed at long-term, non-speculative dividend investors.
Another reason M1 Finance is my favorite broker for dividend investing is that you have the option to automatically reinvest all of your earned dividends with one click. Those reinvested dividends will then be distributed among your portfolio according to the allocation you have chosen for each asset.
Acorns is my favorite micro-investing platform. If you want to start investing some spare change before dealing with ETFs and get the hang of dividend investing, Acorns is the platform for you!
Can you make a lot of money from dividends?
You can make a lot of money from dividends. But keeping in mind that the current yield for most dividend ETF is around 2-3% it will take a lot of capital to achieve a substantial dividend income.
X * 0.03 = $12,000 <–> 12,000 / 0.03 = $400,000
In order to make $1,000 in dividend earnings per month at the above yield, you would need to invest at least $400,000.
Getting started with dividend investing does not require a lot of money. As we have seen you can get started with just under $8 for individual companies or for around $40 for a dividend ETF.
Even though a small investment like that will not make you right overnight it is a good start. As investors striving towards financial independence we need to make sure to develop the right habits early on so that they stick.
Investing for the long term requires patience and perseverance. Dividend investing teaches you both!
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1)Personal Capital is simply the best tool out there to track your net worth and plan for financial freedom. Just their retirement planner alone has become an invaluable tool to keep myself on track financially. Try it out, it's free!
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3) Fundrise is by far the best way I've found to invest in Real Estate. You can diversify your portfolio by investing in their eREITs or even allocate capital to individual properties (without the hassle of managing tenants!).
4) Groundfloor is another great way to get exposure to the real estate sector by investing in short-term, high-yield real estate debt. Current returns are >10% and you can get started with just $10.
5) If you are interested in startup investing, check out Mainvest. I've started allocating a small amount of assets to invest in and support small businesses. Return targets are between 10-25% and you can start with just $100!
To see all of my most up-to-date recommendations, check out the Recommended Tools section.