As I write on The Dividend Guy Blog, I notice that many young investors are starting their investing journey and looking for answers. If you are interested in investing for dividends but you have less than $10,000, you might think that it’s not enough. You might be tempted to wait longer in order to build a bigger portfolio before starting to invest in the stock market.
However, if you are putting your money in an ING savings account for 4 years, you won’t be getting much interest and you will be stuck with the same problem (unless your savings’ habits are impressive!). I personally think that you can start investing in the stock market with less than $10,000. Here are a few tricks to start your investing journey with a small portfolio:
#1 Use DRIPs
Dividend reinvestment plans (DRIPs) are awesome since they allow you to reinvest the dividends issued by a company back into its shares. This allows you to grow your position in the same company without incurring additional transaction fees. On top of that, this also gives you the opportunity of not leaving a small dividend payout of $15 for example in your cash account, waiting to have enough liquidity to buy another stock.
#2 Invest for the Long Term
If you have a small portfolio, don’t try to make it big with day trading. In fact, day trading is pretty dangerous and it’s even worse when transaction fees eat up a good part of your yield. Buy shares that you intent to hold for several years. The dividend payouts along with capital growth will compensate for your transaction costs.
#3 Compliment Your Investments with ETFs
You are going to tell me that it’s hard to be diversified if you have $5,000 to invest (once you have bought 3-4 stocks, you are pretty much to the maximum of your capacity). This is why I would suggest that you buy maybe 1 or 2 stocks and compliment it with diversified ETFs (either a dividend or stock market ETF). This will allow you to keep a decent diversification within your small portfolio with little cost.
If you are saving money on a monthly basis, I would advocate selecting an index mutual fund or an index ETF that allows systematic investments. This will decrease your trading fees once again and you will be able to invest your savings right away.
#4 Be Careful With the Choice of Your Brokerage Account
If you are going to open a brokerage account to invest, be careful to review each brokers. Consider DRIP possibilities along with transaction costs. At the moment, you can find good deals at
Questtrade (For Canadians)
and Tradeking (for Americans).
#5 Make one Trade at a Time
You don’t have much money to invest, don’t waste it. It’s not a bad idea to take your time and analyse each of your potential trades carefully. Take the time to run it through a dividend stock analysis template and look at the fundamental analysis. There is no such thing as rush or “time limited opportunities”. Remember, you are investing for the long term, don’t waste your time on speculative plays.
#6 Buy Small Lots
If you look at buying a few stocks with a small portfolio, I suggest you buy small lots (under 100 shares). If you look at my current holdings, I own several odd lots (25, 50, 48, 90, etc.). The important point is to have at least $1,000 invested in a specific company. Therefore, if you pay less than $10 per trade, this equals to a maximum of 2% management fee ($20 on $1,000) to buy and sell your shares. As long as you keep it below 2%, you are a winner compared to mutual funds ;-).
Final thoughts on dividend investing with a small portfolio
As I have mentioned before, I think that it’s important to invest as early as possible. However, since you can’t diversify a portfolio of $5,000 with only stocks, adding an index fund or index ETF would be a wise thing to do. In fact, I think that you are better off starting with a small portfolio. Therefore, if you make an investment mistake, it won’t cost you much (imagine losing 30% of a 100K portfolio? I think you are better off losing 3K out of 10K! ).
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