Dividend investing; also commonly known as Income investing, is an investment strategy that focuses on investing in stocks that pay high dividends or have rapidly growing dividends.
This blog post is fifth in a series of posts called – “All You Need To Know About Different Investing Strategies“.
The obvious advantage of using this strategy is – it creates another stream of income for you while portfolio grows with asset appreciating in value.
Many people invest in dividend-paying stocks to take advantage of the steady payments and the opportunity to reinvest the dividends to purchase additional shares of stock. Since many dividend-paying stocks represent companies that are considered financially stable and mature, the stock prices of these companies may steadily increase over time while shareholders enjoy periodic dividend payments.
What is a Dividend?
A
dividend is payment made by a corporation to its shareholders in
the form of cash or stock. Anyone who is a shareholder, he can think of a
dividend as his share of the company’s profits. Most stable companies offer
dividends to shareholders. Dividends are paid in cash or as additional shares
of stock. While small companies may just have one or a few owners, very large
companies raise money through selling shares and distributing the ownership
over thousands of owners.
After
paying its creditors, a company can use part or whole of the residual profits
to reward its shareholders as dividends. However, when firms face cash shortage
or when it needs cash for reinvestments, it can also skip paying dividends.
When a company announces dividend, it also fixes a record date and all
shareholders who are registered as of that date become eligible to get dividend
payout in proportion to their shareholding. The amount is usually credited to investors account in a few weeks time.
Types of Dividends
Dividends as said earlier are a your share of the profits that you get. Now a company can reward you with dividends by various means. Here’s some listed:
Cash Dividends
This
is the most common form of dividend per share an investor will receive.
Cash dividends represent ownership to a firm’s distributed profits to
shareholders and provide an incentive to investors to own the shares of large
companies, even if they are not growth-oriented. Companies that pay
cash dividends typically generate strong cash flows for subsequent
quarters.
Property Dividends
A
property dividend is an alternative to cash or stock dividends. A property
dividend can either include shares of a subsidiary company or
any physical assets owned by the company such as inventories, equipment
or real estate. The dividend is recorded at the market value of the asset
provided, although the shareholder may hold onto the asset for the
possibility of further long-term capital gains.
Stock Dividends
Stock
dividend is a form of dividend payment where the companies
return a profit to their investors by giving them additional shares of the
company instead of a cash dividend. This makes them own a higher number of
shares in that company. The decision of issuing this stock dividend is done by
the board of directors of that company.
Scrip Dividends
The
company promises payment to shareholders at a later date. Scrip dividends are
essentially a promissory note to pay shareholders at a future date.
When a corporation issues a scrip dividend, they’re allowing shareholders to
increase the size of their holdings without incurring any fees.
Liquidating Dividends
The company liquidates all its assets and pays the sum to shareholders
as a dividend. Liquidating dividends are usually issued when the company is
about to shut down payments are based on how many shares a shareholder has in
the company.
Should You Invest in Dividend Stocks?
A company that pays consistent, rising dividends is likely a financially healthy firm that generates consistent cash flow – this cash is where the dividends come from, after all.
These companies are often stable and their stock prices tend to be less volatile than the market in general. As such, they may be lower risk than companies that don’t pay dividends and that have more volatile price movements.
Because many dividend-paying stocks are lower risk,
they make an appealing investment for both younger people looking for a way to
generate wealth over the long haul and older adults who want to build a steady
income flow during retirement.
How to Invest in Dividend Stocks?
Buying dividend stocks is the same as buying any other kind of stock.
First, investor has to open a brokerage account with an online
broker and fund the account. Second, he needs to research the kinds of
companies that pay a dividend and are considered reliable in their payments,
proven long-term record of stability, growth, and profitability. Many
online stockbrokers offer tools like screeners that will help investor
easily find stocks that pay a high dividend. Once having developed plan
and investing strategy, there are numerous ways to invest in it.
The basic principles are:
- Invest in lots of dividend-paying companies at the same time. Before investing in any company, check whether earnings and revenues are growing and ensure it’s not overly burdened with debt. All of these factors have an impact on payouts.
- Invest in companies with steady long-term dividend growth. When a company issues a profit warning it usually sets off alarm bells that its dividend could be in danger. Also, if a firm’s dividend is out of sync with its competitors’ payouts that too could be a sign that all is not well.
- Most companies allow their shareholders the ability to setup a dividend reinvestment plan or Drip. These plans make it easy on the investor as all dividend payments are invested directly back into more stock.
- Tax rules can change and the benefits and drawbacks of any particular tax treatment will vary with individual circumstances. For the legal or tax implications of any investment, seek independent professional advice.
How to calculate Dividend per Share?
DPS
In
this formula for Dividends per Share, the most important part is the “number of
shares”. Simply take the record of the beginning shares and the ending
shares, and calculate the simple average of outstanding shares. Or else,
go for weighted average.
Where can you find the Dependent Variables?
You can usually find everything you need (periodic outstanding shares and dividend paid ) by going to the company’s website and clicking on Financial Statements.
Dividend per Share!
$$DPS = { \left(Annual Dividend \over Number of Shares \right) }$$
Famous Investors Associated with Growth Investing
Anne Scheiber, who was born in 1893, studied at secretarial school
before working as a bookkeeper. She later graduated from George Washington
University with a degree in law. She accumulated stocks in brand name companies
and then reinvested dividends for decades.
She is one that speaks to the power of dividend reinvestment
plans. Grace Groner held her shares over 70 years, and through the
power of capital gains, share splits, and reinvestment of
the dividends she amassed a fortune. At the time of her death at age
100 on January 19th, 2010, Grace owned more than 100,000 shares of
Abbott Laboratories which were valued at approximately $7 million.
Ronald Read, who left an $8 million fortune behind when he passed away
in 2015. The portfolio was generating close to $20,000 in monthly dividend
income on average. This portfolio was a result of frugality, hard work, and
ability to buy stocks to hold for decades, while patiently reinvesting
dividends.
In any investing strategy, its difficult to leave Mr. Buffet out. He is like Sachin Tendulkar, if there is a worthwhile stat, he will feature.
Primarily known as a value investor, he is also a big fan of dividends
as well. Warren Buffett’s Berkshire Hathaway’s dividend income from top six
companies alone in a year is estimated at roughly about $2,860 million ($2.86
billion). Warren Buffett has a total of 47 companies in his portfolio, majority
of which are actually dividend paying.
Final Thoughts
It is the simple stock pick held over a long time that works out the
best. Getting started with dividend investing can be a little intimidating at
first when anyone considers all of the moving parts at hand. For beginners,
it’s important to take the time to understand basic concepts, like all of those
outlined in this article, before moving onto more involved strategies.
