2. Rising Income

Some dividend securities provide ongoing income that rises over time. Rising income is a valuable offset to inflation, particularly in retirement—when you don’t have the opportunity to get a raise at work.

Dividend stocks are categorized by how many consecutive years they have raised their shareholder payouts:

1. Dividend Achievers have raised their dividends for 10 consecutive years and counting. Bank of America (BAC) is in this category.
2. Dividend Contenders have raised their dividends for 10 to 24 years in a row. Insurance company Travelers (TAV) is a Dividend Contender.
3. Dividend Aristocratshave increased their dividends for 25 years or more. McDonald’s (MCD) is in this group.
4. Dividend Kings have increased their dividends for 50 consecutive years. There are only about 50 companies with this designation in 2025. Retail chain Target (TGT) is a Dividend King.

These companies can cancel or reduce their dividend at any point, so their current status does not guarantee future income. Therefore, diversification is important. When your income portfolio is diversified, you are less dependent on one company’s dividend policy.

3. Suitable for Beginners and Risk-Averse Investors

Not every company can pay dividends consistently for decades. This achievement requires:

• A reliable, steadily growing business
• Predictable and strong cash flows
• Disciplined leadership
• Manageable debt

These same qualities encourage low stock-price volatility and relatively consistent earnings. This is why some of the best dividend-paying stocks are blue-chip companies. Blue-chip describes large, financially strong companies with recognizable brand names such as Chevron (CVX), IBM (IBM) and Walmart (WMT).

4 Steps Of Dividend Investing

Even if you’ve never invested before, you can start dividend investing in four simple steps. You’ll choose an account, pick your asset type, invest and automate.

1. Choose An Account

Earned dividends are taxable, even if you reinvest them. Many domestic stocks pay qualified dividends, which are taxed at the long-term capital gains rate. Nonqualified dividends are taxed at the higher ordinary income tax rate.

You can defer the annual federal tax obligation by holding your dividend payers in a tax-advantaged account. 401(k)s, IRAs, HSAs and 529 plans provide tax deferrals on investment earnings.

Tax-advantaged accounts have withdrawal restrictions, which can be good or bad depending on your goals. If you are investing to build retirement income, then it makes sense to hold dividend securities in an IRA or 401(k). If you prefer to access the income sooner than retirement, a regular brokerage account or direct investment with the company will do. In this case, remember to plan for a higher tax bill each year.

2. Pick Your Asset Types

Next, you will pick which types of security you prefer. This may be an easy choice if you invest in a 401(k) with limited investment options. In accounts with broad access to publicly traded securities, you can choose from individual stocks, REITs and funds.

Stocks

Stocks are ownership shares of publicly traded companies. The dividend payments represent your share of profits.

• Pro: You can customize your risk tolerance and yield with a stock portfolio.
• Con: You should own 20 or more individual stocks, so you aren’t overly dependent on any one stock.

REITs

REIT stands for real estate investment trust. These entities own and manage real estate. Special tax treatment requires REITs to pay 90% of their taxable income to shareholders.

• Pro: REITs often pay high dividend yields.
• Con: REIT dividends are often nonqualified and taxed as ordinary income.

Funds

Mutual funds and exchange-traded funds (ETF) are investment portfolios that sell shares. As a fund shareholder, you earn when the portfolio produces income or increases in value.

Many funds focus on dividend-paying securities to provide income for their shareholders. Examples include Schwab U.S. Dividend Equity ETF (SCHD) and Fidelity High Dividend ETF (FDVV). There are also REIT funds, such as iShares Core U.S. REIT ETF (USRT) and SPDR Dow Jones REIT ETF (RWR).

• Pro: Funds are diversified, so you only need one good one.
• Con: Funds charge fees, which dilute your returns. Fees are disclosed to shareholders as expense ratios. Cost-efficient dividend funds have expense ratios of 0.30% or less.

3. Research And Invest

Next, you will research your options and place your first trade order. You can prepare for this step by deciding whether to prioritize dividend yield or income consistency.

Dividend yield measures income efficiency. It is calculated as the annual dividend payment divided by the share price. The Dow Jones Industrial Average, a blue-chip index, pays an average dividend yield of 1.82%. Some stocks and REITs pay much higher yields, but the payments may vary over time.

If you are not yet comfortable analyzing a stock or REIT’s yield, dividend track record and financial health, opt for a fund with a low expense ratio and 100 or more securities in its portfolio.

4. Automate

Consistent, recurring investments help you grow your dividend portfolio and income potential faster. Consider setting a monthly investing budget and automating those trades in your investment account. You can also reinvest your dividend payments automatically. This allows you to raise your income potential through compounding, which happens when your investment earnings generate more earnings.

Many brokerage accounts allow for automatic dividend reinvestment. If yours doesn’t, look for stocks or funds that offer direct investment and free dividend reinvestment plans (DRIP). Direct stock purchase plans are managed through the company rather than a broker. They may have lower fees than brokerage accounts, but the shares can be harder to sell. Computershare is a good resource for researching DRIPs.

Build Your Dividend Income Stream

With the right investments, your dividend program can be low-maintenance and self-propelling. Opt for stocks or REITs with long and consistent dividend track records and low-fee funds emphasizing dividend reliability. Invest often, reinvest your dividends and watch your income potential grow over time.