Dividend
A dividend is the distribution of some of a company’s earnings to a class of its shareholders, as determined by the company’s board of directors. Common shareholders of dividend-paying companies are typically eligible as long as they own the stock before the ex-dividend date. A dividend is a token reward paid to the shareholders for their investment in a company’s equity, and it usually originates from the company’s net profits.
Dividend stocks?
Dividend stocks are companies that pay out regular dividends. Dividend stocks are usually well-established companies with a track record of distributing earnings back to shareholders. The dependability of dividends from these stocks is a big reason to consider when buying stock. Not every stock must pay a dividend, but a steady, dependable dividend stream provides nice balance to a portfolio’s return.
They help cushion declines in actual stock prices
Dividend helps cushion declines in the actual stock prices, but also presents an opportunity for stock price appreciation coupled with a steady stream of income from dividends. This is why many investing legends such as John Bogle, Warren Buffett and Benjamin Graham advocate buying stocks that pay dividends as a critical part of the total “investment” return of an asset.
Read also: Nigeria’s stocks gain N170bn in week ended Oct. 22
Who should buy dividend stocks?
When examining the 2 ways of getting paid to invest—capital gains and dividends—it’s natural that dividends have special appeal. A stock’s capital-gains potential is influenced significantly by what the market does in a given year. Stocks can buck a downward market, but most don’t. On the other hand, dividends are usually paid whether the broad market is up or down.
Many beginning investors do not understand what a dividend is — as it relates to an investment—particularly for an individual stock or mutual fund. Dividend-paying stocks provide a way for investors to get paid during rocky market periods, when capital gains are hard to achieve. They provide a nice hedge against inflation, especially when they grow over time. They are tax advantaged, unlike other forms of income, such as interest on fixed-income investments.
Like all investments, dividend stocks come in all shapes and colours, and it is important to not paint them with a broad brush stroke. One of the first things most new investors learn is that dividend stocks are a wise option. Generally thought of as a safer option than growth stocks—or other stocks that don’t pay a dividend—dividend stocks occupy a few spots in even the most novice investors’ portfolios.
Dividends are income generating…
Many investors look to dividend-paying stocks to generate income in addition to capital gains. A high dividend yield, however, may not always be a good sign, since the company is returning so much of its profits to investors (rather than growing the company.) The dividend yield, in conjunction with total return, can be a top factor as dividends are often counted on to improve the total return of an investment. Dividend yield may be counter-intuitive, but as a stock’s price increases, its dividend yield actually decreases. Dividend yield is a ratio of how much cash flow you are getting for each naira invested in a stock.
A dividend is the distribution of corporate profits to eligible shareholders. Dividend payments and amounts are determined by a company’s board of directors. Dividends are payments made by publicly listed companies as a reward to investors for putting their money into the company. Announcements of dividend payouts are generally accompanied by a proportional increase or decrease in a company’s stock price. Many companies do not pay dividends and instead retain earnings to be invested back into the company.
Things to consider before buying dividend stocks
Dividend stocks are known for being safe, reliable investments. Many of them are top value companies. The dividend aristocrats—companies that have increased their dividend annually over the past 25 years—are often considered safe companies. It is however worthy to note that just because a company is producing dividends doesn’t always make it a safe bet.
Dividend investing is a tried-and-true method of wealth accumulation that offers inflation protection in a way that bonds do not. But finding top-notch dividend-paying companies can be a challenge.
Watch out for
If you plan to invest in dividend stocks, look for companies that boast long-term expected earnings growth between 5percent and 15percent, strong cash flows, low debt-to-equity ratios, and industrial strength. When selecting dividend-paying companies, long-term profitability is a major consideration. Though any company can occasionally experience a profitable quarter, only those that have demonstrated consistent growth on an annual basis should make the selection.
Also, companies should boast the cash flow generation necessary to support their dividend-payment programmes. Investors should avoid dividend-paying companies that are saddled with excessive debt. Beyond studying a specific company’s fundamentals, investors should likewise educate themselves about broader sector trends to make sure their chosen companies are positioned to thrive.
