Dividend Investment and How It Works

Dividends are remunerations that a corporation distributes to its shareholders, depending on the share amount each shareholder has. For instance, when you own stocks paying dividends, then the company is obliged to share with you any made profit. Therefore, dividend investing entails investing in stocks that pay dividends.

Note that not all corporations’ pay dividends, the Board of directors usually decide whether a particular company is eligible to pay dividends or not. A Company distribute dividends its shareholders or reinvest on these profits depending on the agreement reached by its shareholders and the entity.

As a Shareholder of a particular stock, you are required to satisfy specific requirements before receiving any distribution or dividend payouts, such as being a shareholder of record on one particular or subsequent date that the Board of directors has designated.

Dividend investing can be a perfect opportunity for investors looking for other means of income generation or only, building wealth through reinvesting dividend payments. It could also be a viable solution for investors looking for investments with lower risk, which is often found in buying stock. But beware that there are pitfalls that could make dividend stock risky, especially when you have no idea what to look for.

Mode of Dividend Payments

dividend payment

  • Cash Dividends – These dividends are paid in terms of currency usually transferred electronically via electronic funds transfer, or through paper cheque. The cash dividends are generally taxable to the recipient and are issued quarterly or yearly.
  • Stock Dividends – These are dividends paid in terms of additional stock shares of a specific issuing company or another company, for instance, a subsidiary company. These shares are typically issued regarding the share proportion of each shareholder.
  • Property Dividends – These are dividends paid out in asset form by the issuing company or its subsidiary. This mode of dividend payment is sporadic.
  • Interim Dividends – These are dividends made to shareholders before the company releasing its annual financial statement or the company’s annual general meetings.

Before you decide to make dividend investments, these are some tips you should be aware of to make the right investment choice.

Tips for Profitable Dividend Investing

1. Look for Safety in a Dividend

A wise investor looks for dividend safety that has some surety that is the company will continue paying dividends at higher or the same rate. Some companies determine through accessing and ranking the safety of different classes of stocks. You can also analyze the level of a company’s security by making a comparison between the company earnings to dividend payments.

The safety of dividends can also be determined by how new or risky an industry is. Although a corporation has a low dividend payout ratio, your dividend payment is still not safe if there is instability in the industry. Make sure to identify companies that have stable cash inflow and income. The payout ratios largely depend on the stability of company earnings.

2. Define a Strategy and Hold on to It

investment strategy

As a good dividend investor, you should put much focus on the high dividend growth rate or the high yield dividend approach. These two approaches serve different and critical roles in your portfolio. A high dividend yield approach kingpin is companies that have a slower growth rate with cash inflow that is substantial. This facilitates funding of large dividend payments and the production of an immediate income.

A high dividend growth rate approach put a focus on buying stock in corporations who that the moment has a fast growth due to payment of dividend that lower than the average dividend. This strategy allows you as an investor to buy a stock that is profitable at a lower rate and make a good income over a short period.

3. Look for Tax Benefit Dividends

tax benefits

You, as an investor, should look for dividends that qualify some tax benefits. Most dividends are taxed as any income; however, qualifying dividends stocks with a holding period of 60 days or more, are taxable at a lower gain of capital. For instance, if you buy a dividend stock to get dividend payments, then afterward quickly sell the stock, you will be mandated to pay your tax regularly on the dividend income.

Dividends Margin Accounts Investing

Dividends Margin Accounts Investing

As an investor, if you decide to invest your dividends through margin accounts rather than cash accounts, there is a possibility that your broker will take the stock shares you own then lend to traders who need to short the stock. In return, traders who sold your held stock without informing you are supposed to pay you the dividends you missed because, at the moment, you don’t own the stock.

You can then receive money from these traders accounts provided they keep their short positions open, the deposit you receive is equal to what you would have obtained paid in an actual dividend income.

Dividend Important Dates

  • Declaration Date – The Board of Directors announces this date to its Shareholders.
  • Date of Record – Also known as the ex-dividend date, is the date where the shareholders are declared eligible for dividends. This means that if you own stock in the company before that date, then you will receive bonuses.
  • Payment Date – This the actual day of dividend distribution to shareholders.

Advantages of Dividend Investing

  1. It’s a Preservation of Capital – High-quality dividend-paying companies are more stable and mature than other average companies. Such stocks can preserver harsh economic times than speculative stock.
  2. Income Stream Creation – Dividend investing facilitates a regular stream of income. Most stocks pay dividends quarterly, but a well-constructed portfolio can provide a monthly stream of income.
  3. Hedge Against Inflation – Dividend stock enables you to receive income that maintains its purchasing power of invested income.
  4. Getting Paid for Waiting – Dividends provide you continuous returns while waiting for capital to appreciate.

Dividend investing could earn you a lot of money as an investor provided you do your homework when deciding which stock to invest i. However, dividends are not guaranteed since they are subject to macroeconomic variables such as inflation as well as specific risks of a company. One demerit of dividend investing is that the majority of companies that issue dividends are not high-growing leaders in the market though there are some exceptions. If you haven’t thought of this kind of an investment, then it’s time to provide stability to your portfolio with high quality growing stock.

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