What is divided?
Dividends are a corporation’s profit-sharing with its shareholders. Essentially, a corporation rewards its shareholders for investing in their company. Dividend payouts can be scheduled at different frequencies like monthly, quarterly or annually. Dividends are typically associated with corporations that maintain predictable profits or may not have much room for growth anymore. Not to say that they experience very little growth, instead, they are considered much steady in growth.
An example of a steady dividend-paying corporation is Coca-Cola Co. They have been on the stock market since 1919 and started paying dividends starting from 1920. The company has always been remarkably stable with steady growth and very minimal competition.
Why dividend investing?
What makes dividend investing better than normal stock investing is the dividend earned. Dividend investing rewards its shareholders for buying shares in its stock. Also, like a regular stock, it also grows over time. Essentially, you obtain a secondary benefit from dividend-paying companies.
The idea with dividend investing is to hold on to a stock and try to reinvest all the dividend earned towards buying more shares of the same or a different company.
For instance, you invested $1,000 in XYZ corp. and bought 100 shares. XYZ Corp. offers a 4% dividend yield and saw a growth of 10% this year. This means your $1,000 investment is now worth $1,100 and you also gained a dividend of $40.
Dividend Stocks are a safer Investment
What’s great about dividend stocks is the dividend yield has an inverse correlation with the stock price. When a stock price goes up in value the yield percentage will go down, but if a stock value goes down in price, the dividend yield will go up in percentage to return the same dollar value as that was promised.
For example, you own a Walmart share for $100 with a dividend of 4%. The company has legal issues and the stock price drops to 50% in value. Your stock lost 50% of its value but since 4% was returning $4 it will directly be increased to 8% to make up to the $4. Now, let say Walmart is doing incredibly with its online grocery delivery business and the stock doubles its value to now be $200. Your stock gained a 100% return but since the stock went up in value, the dividend is now 2% which equals $4.
I consider them a safer alternative because most well-established companies offer dividends but of course not all are well-established. These companies are well known in their sectors and have a strong record of paying their dividends. Not to say they can’t go bankrupt but generally are a safer bet compared to regular stock. If worst comes, at least you are getting paid while you wait for them to turn things around.
High dividends are not always the best
The dividend yield will give you a great passive income but it could possibly become an investment trap. Let’s go over the above example of Walmart under “Why dividend stocks are a safer investment” again. As mentioned earlier, if a company is losing its stock value, the dividend yield is higher to make up for the lost value and to deliver the agreed dividend dollar value.
Any company can start paying dividends to attract more investors.
Hypothetically speaking, let say ABC company is a utility company and has been around for about a year. They are now worth $10 and are offering a $1 or 10% dividend. Although the dividend yield is much higher than many other companies the risk on this investment is much higher as well. They could slash their dividends after 2 years of being in business or could potentially file for bankruptcy.
As a dividend investor, your focus should be to go for companies offering a higher dividend but with a recorded history of paying a dividend. This way you can minimize your risk, earn a good dividend, and watch your investment grow.
Common Stock Market Terminologies:
Here is a list of the commonly used financial indicators shown on all most all investing tools. These are broken down to be easier to understand while also not intimidating you from investing.
Is the period between the announcement and the payout date. Essentially, a shareholder that bought a dividend stock after the ex-dividend date would be ineligible for that dividend.
Forward Dividend & Yield
These are the values that provide information related to your dividend payment. Forward dividends are an estimate of the current dividend yield in dollar amount. While the dividend yield is the substantial percentage decided for the payout.
Earnings Per Share (EPS) is used to determine the value of earnings per share which indicates the profitability of a company. This is calculated by dividing the companies net income with its outstanding shares. EPS is a valuable indicator that helps determine the real value of the stock the market is willing to pay. A higher EPS value indicated investors are willing to pay more for a company because this indicates they are profitable.
Beta is a value that determines a stock’s risk factor. A beta value of 1.0 indicates a direct correlation with the stock market. A higher value would mean it is more volatile than the stock market, while a lower value would mean less volatility than the stock market. For instance, a value of 1.3 would mean it is 30% more volatile than the stock market, while a value of 0.7 indicates its 30% less volatile.
P/E ratio is used to determine a company’s current share price compared to its earning per share. P/E ratio is used by investors to determine if the stock is over-valued or under-valued. A higher ratio would indicate over-valued, while a lower would indicate under-valued.
This refers to the combined value of all of the shares the company has. It is used to determine the size of a company. A company with 10 million shares selling at $100 would have a market cap of $1 billion.
A volume of stock refers to the number of shares being traded in with-in a period. The higher the more volatile but anything lower than 10,000 is generally considered as low-volume stock.
1y Target Est
1-year Target estimate is based on the opinions of the analyst and their set expectations of the share price after 1 year. These can generally vary from institutions to institutions and should not be used as a bases of your decision.