If you’re new around here and you’ve been doing some research about dividends, then you might find it useful to understand a little more about what they actually involve.
However, knowing what a dividend is and why dividends matter is only half the battle, in fact having some knowledge of how to best use them, can really set you up for the future.
Once you’re ready to get started, it’s a good idea to set up a dividend portfolio strategy.
What are dividends?
It is a strategy of buying stocks that pay dividends in order to receive a regular income from your investments. Dividends are the cash flows that a company elects to pay out to its shareholders as a reward for holding the shares over time.
There are two paths for potential profit when investing in dividend-yielding stocks, which are Capital Gains via Stock price increase and dividend yields. It’s common for investors to look for dividends that provide long-term growth, that yields a lower risk.
However, experienced dividend growth investors will generally invest significantly in stocks that pay dividends in order to make money.
Companies usually announce dividend payouts as part of their earnings reports. The company will specify exactly how much it will pay per share and the date in which the dividends will be realized. While dividends are usually derived from company profits, some companies choose to pay dividends even during times of loss, to retain their existing investors.
Trust dividends ultimately depend on the income being paid by their underlying investments. Some investors use their dividends to supplement their Social Security check during retirement. Other investors who wish to avoid taxes or who are still building a nest egg, might prefer to see a company reinvest all of its cash into the business to spur higher levels of growth.
What about dividend yields?
For most investors, the higher the yield the better, but only up to a point. Abnormally high yields can indicate heightened levels of risk. A good starting point for investors is to compare a stock’s yield to that of the S&P 500 Index to get a sense of whether it is high or low, since market conditions can change over time.
Some companies offer higher yields than others, so it’s a good idea to make some comparisons before you make any decisions.
What does the current crisis mean for dividends?
Many companies are now scrapping dividend payments as the coronavirus continues to have a devastating effect on stock markets around the world.
Banks, insurers, housebuilders, travel, mining, and general retail are likely to see the biggest cuts and many have cancelled or suspended plans for share buy-backs.
However, income-paying investments remain vital and especially so in the wake of the market volatility that has resulted in dividend-paying stocks suffering huge losses. Reinvestment is more important than ever.
Slower growth going forward?
Now is the time that trusts will be tapping into revenue reserves to maintain their dividends. However, many will want to build them back up again over the next few years, to allow for the economy to recover.
It could mean slower dividend growth and will be based mainly on how directors choose to prioritize the level of dividend relative to the make-up of their portfolio and their cash/debt position.