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Make money with cheap dividend stocks

Updated on September 16, 2014
  • The cost basis of your position is the total of all costs associated with reaching that position.

  • ((sale price*number of shares)-commission fee)-Cost basis=Revenue accrued.
  • A position is the investment once purchased.

In essence the process of understanding dividend stocks is pretty straightforward, we will learn a few simple key terms and then learn exactly how you can use paid dividends to decrease your break even point. After that it is a simple matter of integrating dividends paid into an existing trade system.( Or for those of us using less than 1,000 dollars to trade, choosing a stock with no bad press and within our chosen price range.)

The stock market gets scary sometimes, check out this article if your looking for information about getting into trading. This article assumes you are familiar with and have made the decision to invest.

Investing with low capital is a challenge to begin with, and something not to be taken lightly. As with any financial endeavor(honestly any endeavor ever) you must make all decisions on your own and accept all the risks. I make no claims that I can make you wealthy, or that in following my advice you won't lose what you've invested. These are all risks inherent in trading, and my previous article discusses protecting yourself in detail.

The task you will perform most often when dealing with low capital trades is calculating your break even point. TradeKing and most other trading platforms make this fairly easy, so we'll talk about it briefly.

When you have acquired an investment that investment is then called a position. This article specifically refers to low cost stocks or penny stocks that pay dividends. The cost basis of your position is the total of all costs associated with reaching that position. This means that all fees associated with the purchase need to be included as well. If you buy fifty shares at a dollar each and are charged a five dollar commission on the trade then the cost basis of your position is $55. That means that any time in the future you sell said position you will need to make at least $55 to break even.

Your sales revenue is the total sale price of your position minus any fees you have to pay to make the sale(usually a commission for the broker) This means that in order to calculate how much money your going to make or lose on any stock sale you do the following math:

((sale price*number of shares)-commission fee)-Cost basis=Revenue accrued.

If this number is positive you would make a profit, if it is negative you would lose money. Try taking the quiz to the side and see if can get the answer.

Dividend paying stocks change this math over time; lets learn about important features to note in the dividend world that differ from plain old stocks.

Source
  • Dividends are periodic cash payments made to shareholders.
  • The dividend ex date is the date by which you must own a stock to get dividends.
  • This website has a useful free dividend stock screener.

Dividends are payments made periodically to stockholders. For our purposes that's as far as we need to go. There are some dates and phrases you need to remember if your planning on working with dividend stocks.

First off is the dividend ex date. This is the date that a company decides who gets paid a dividend. Generally this day is the day of, or the day before the record date. If you own a stock by the dividend ex date then you will get paid dividends on the dividend pay date, usually less than a month after the dividend ex date.

In short, if you are looking for dividend paying stocks you should look for stocks that generally meet whatever trade strategy you prefer, and that have an upcoming dividend ex date. I use this website to search for proper stocks paying dividends, it is super simple and streamlines the process.

Some people are content to buy a dividend paying stock and then simply holding it. This will serve to make some money, but it will minimize your earning potential because your money is being tied up.

Take a look at how the dividend process changes your break even point, lets look at the original example of your 50 shares of X. Your initial cost basis is $55, because you purchased it at fifty shares and a dollar a share. Lets say you bought it because the dividend ex date is three days away. The market price today is $0.90

((0.9*50)-5)-55= -15

So you would lose five dollars if you sold that stock immediately. So of course you hold onto it, past the dividend ex date, and they pay you $0.10 per share. Pay date comes and now you have to change your math a little. Your going to add the money paid from dividends over the course of the position after you subtract the fees from the sale.

((sale price*number of shares)-commission fee+(Dividend payment1+Dividend payment2....)-Cost basis=Revenue accrued.

Dividend payment after your first paydate is 0.10 times 50(number of shares) = 6

((0.9*50)-5+5)-55= -10

So even with the dividend payment you still can't sell your stocks yet(if your trying to make a profit on this sale; but from a single dividend payment your break even point dropped by five dollars; this makes a huge difference when you don't have much money to invest. It should also be noticed that a ten cent dividend on a one dollar stock is simply not going to happen, but it made the math easy.

In general after dividend ex dates happen and around pay date the stock price drops as people who bought it for the dividend try to get rid of it, but the price also generally rebounds. If you use an existing trade method but incorporate dividend paying stocks into your system you are able overtime to effectively offset the cost of trading by getting paid dividends. This is very helpful when your trading with under $1,000 since it takes a much larger change in price to offset the commission.

In summary dividends are more simple to understand and research than I thought they were when I first got into the stock game; you can use this screener just like any other stock screener for your research; and the price of stocks that pay dividends are volatile enough that they still match my existing trade strategy; with the added bonus of course of paying me just for owning them every now and then, which makes making a profitable sale overtime easier, and absorbs sometimes all the loss from buying a stable stock.

What have you been reading lately?

Having trouble picking a next book to read? I've been on a huge Warhammer 40K kick of late. They sell series books in what they call an omnibus, which is usually three or four books in one, way cheaper than buying them one at a time. Warhammer is a dark universe in the super future. In the books I most recently finished, and probably some of my favorite Warhammer books of all time in fact, the Ciaphas Cain series follows a loveable hero trying to save his own skin through disaster after disaster somehow managing to accidentally save everyone else along the way. Lots of humor, action, and political intrigue. Check it out.

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