What Is Dividend Stock?
Dividend stock can be explained as when companies make a profit, they decide how much to save for future growth and how much to back to shareholders via a dividend.
The companies occasionally pay out what is known as dividends to their shareholders, generally on a quarterly basis to attract more shareholders and also just a way of saying a ‘Thank you’ to their investors.
High dividend stocks provide a Guaranteed income source for the investors, no matter how new the investor maybe!
Growth Companies use their profits to fund future growth and pay a little dividend if they have a pay out policy.
Yield Companies are more established and have lesser room for rapid expansion and they don’t need additional funds so they pay a higher proportion of their profits to shareholders as a dividend.
Who Is It For?
If you have the capital and are interested in the stock market and have no idea at all.
At the same time if you do not want to take any risk on your money, then investing in high dividend stocks can be one of the most profitable ways to increase your finances.
How Does Dividend Yield Stock Pay?
In this, you need to invest a significant amount of money to receive higher dividend pay outs.
Many companies pay around a 5% dividend yield to their shareholders.
Suppose, you own 100 shares of Cola-Cola, at $30 per share. At a 5% dividend rate, your quarterly pay out would be $150.
That is, 5% of a single $30 share is $1.50 which is multiplied by your number of shares -100.
Some companies even pay dividends to investors AFTER they have paid tax on the profit.
Advantages Of Investing In Dividend Yield:
- Passive Income: A good source of passive income that can be used for personal expenses or re-investment.
- Lower Risk: Less risky than other stocks because they are generally well established blue chips that are less likely to experience extreme volatility. It guarantees at least some pay out even stock market fluctuates.
- Capital Protection: Dividends provide a buffer against capital loss.
Disadvantages of Investing In Dividend Yield
- Less Growth: Since the high yield companies return profits back to investors instead of reinvesting for future growth which takes time to become wealthy.
- Average Returns: You will get average returns if investing only in large blue-chip companies.
- Limited Companies: Dividend payouts are given by limited companies.
- You can not buy shares from the company directly. You need to buy it through Brokers.
What To Look Out For Before Investing In High Yield Dividend
It is important to establish the reason why the company you want to invest in paying such a high dividend. The common pitfalls/reasons may include :
- A falling Share Price.
- Poor Future Prospects.
- A once-off special dividend.
To prevent any unexpected surprises, ensure any high yield investment is not due to a large once-off divided and that the company has the capacity to pay and maintain the dividend it is currently paying to their investors.
The tricky part is choosing the right stocks. You’ve got to investigate each company’s website and be comfortable with their financial statements.
You should spend two to three weeks investigating each company and understand them before investing.
How To Get Started With Investing In Dividend Yield Stock
- The first thing you have to do is learn about the stock market until you have a good understanding of investing and be patient.
- Educate yourself with tutorial videos, podcasts, ebooks, books, prominent investors – anything that will help you to a better understanding of the trade,
- You can practice investing in any buy and sell stocks sites like Investopedia to gain good experience.
- Once you develop the knowledge and are ready to invest, register to any stock trading sites of your choice.
- ETFs (Exchange Traded Funds) are an ideal choice for novices because they are easy to understand, highly liquid, inexpensive, and have far better potential returns because of far lower costs than mutual funds. ETFs are investment funds that hold assets such as stocks, commodities, and bonds, but they trade like stocks.
Important Terminology In Stock Market
- Ex-Dividend Date: Share purchases made on or after this day are not entitled to the dividend. The company’s share price will usually fall by an amount equal to the dividend.
- Record Date: The day share register determines who is entitled to the dividend. Anyone who is not a registered shareholder at 5 pm on the record date will be denied the dividend.
- The record date is set two business days after the ex-dividend date. Shares purchases take three business days to settle.
- Payment date: The day the shareholders get paid the dividend which is usually two to three weeks after the record date.
- Dividend Reinvestment Plan: Some companies allow their investors to reinvest their dividends back into the company at a discount to the current share price through a DRP.
I am not an expert in this field. However, these are the things I looked out for before investing in stocks.
Though any investment in the stock market comes with inherent risk and takes years for becoming a major wealth builder, investing in High dividend yield stock could ultimately improve your financial status and lifestyle in the years to come.
Since the income from the stocks isn’t related to any activity other than the initial financial investment, owning dividend-yielding stocks can be one of the most passive forms of making money.
However, it won’t make you get rich quickly. It will take years to see your profits from it.
It is important to know that you cannot buy stock directly from the company but through Brokers.
You can try brokers with low brokerage fees.
If you’re a new investor, you can easily figure out how much money you’ll earn for every dollar you invest in a company by knowing today’s dividend rate and divide that by today’s stock price to get the current dividend yield.
Knowing how to calculate this will give you a clear picture of what you’ll make compared to the interest you would earn on another investment like a bond.
Do you think it’s worth investing in Dividend Yield Stock? Share your views in the comment section below.
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MLian’s passion for writing is to help you understand that ‘All That Glitters Is Not Gold’. Her mission is to show you Practical and Actionable Ways To Earn Money online and offline to save your time and money – that you won’t get “SCAMMED” into buying something that promises Big but really doesn’t profit anyone except the owners.