What Is Dividend Investing?

What Is Dividend Investing? August 15, 2012

Smart dividend investing can lead to a lifetime of financial support. The idealistic example of a person receiving a monthly income in the mail in the form of dividend checks is enticing, but most people have no idea where to even start when it comes to dividends.

People who want to be successful dividend investors need to begin by understanding the elements of this kind of investment.  So first, we’ll start by answering the basic question of ‘what is a dividend?’

What Is a Dividend?

Even people who do not invest are often familiar with the concept of a stock share. It is a tiny piece of a company. It represents ownership of that fraction of the company. A dividend stock is distinct from other stocks because owners of such stock receive periodic payments from the company in which they own a share. These payments, known as dividends, differ considerably in their size and frequency depending on the issuing company.

A dividend represents a portion of the company’s profits. Many companies take profits and reinvest them in the business in various ways, such as buying new equipment, hiring more labor and awarding pay raises to its workers. Another option for these profits is to pay them out as dividends, or divisions, to shareholders. Often, a company’s board of directors will decide to spend a portion of the profits on reinvestment and another portion on dividends. Some companies issue stocks which require them to pay these dividends to their stockholders.

Holders of dividend stocks receive dividends according to the amount of stock that they own. Holding more stock means that a larger dividend payment will be made. These payments usually consist of cash but may be made in other forms as well, such as store credits or even new shares in the company.

These dividend payments arrive, in the mail or in the form of direct deposits, according to a fixed schedule. Some companies pay out dividends every month, while others only do so every quarter or once a year. However, the size of the payments will often differ because the company’s profits change from month to month and quarter to quarter. A company may make a unilateral decision not to issue dividends due to financial issues. However, such a move can have a negative impact on stock price when disaffected shareholders sell off their stock to seek and purchase more reliable dividend stocks.

What is a Dividend Yield?

Among the many vocabulary terms specific to this form of investment is the dividend yield. This is simply a percentage which is calculated using the dividend issued for each share and the total value of that share. An imaginary share, worth $100, might issue an annual dividend of one dollar. Therefore, its dividend yield is one percent.

Why Do Investors Buy Dividend Stocks?

In many cases, investors have wealth which they can handle in a variety of ways. They can put it in banks or invest it. Banks frequently pay less interest than many successful companies will pay in interest on savings accounts. CDs may offer competitive rates but they restrict the movement of the investor’s money. Dividend stocks are attractive when they earn more and because they pay on a regular basis.

How to Find Good Dividend Stocks

When an investor decides to pursue investment in dividend stocks, it is necessary only to contact a broker and express this wish. Brokers can offer a variety of options. However, would-be investors should be prepared to examine some of the critical information that the broker will share about each candidate stock.

• Dividend Yield

Investors should look for a high-annual dividend yield stocks in their stock choices. This yield ratio should be higher than the interest rates found in banks and the yield of US Treasury bonds. The price of the stock does not matter as much as the yield, since that percentage will determine how much of your initial investment will be returned in the form of dividends. Obviously, ongoing stock-price changes are important because they could bring down the total dividend issued or bring it up.

• Dividend Coverage

There is more to buying a dividend stock than just a high yield. Otherwise, the purchase of these stocks would be a lot simpler. Company fortunes can change and many investors have been fooled in the past by high dividend yields only to lose everything later when the company went bankrupt. It is important to review the source of a company’s income before investing in it.

For example, it is generally considered wise to invest in companies that derive their income from a variety of businesses rather than just one. For this reason, companies with lower dividend yields can compete with other companies. They win over buyers because their dividends seem more likely to be stable, due to their complex sources of income.

• Qualified Dividends

These dividend stocks qualify for special treatment at tax time. The requirements surrounding these qualifications are complicated, but an investor should simply make his or her wishes known to a broker. Avoiding capital gains taxes is a critical part of generating real income from these investments.

Examples of Dividend Stocks

The best dividend stocks vary a little from year to year. Here are some of the most valued dividend stocks for 2012.

• Abbot Labs

This company pays out its dividends every year on the 15th of August. The present yield is 3.09 percent.

• Resource Capital

This company has an astounding yield of 14.4 percent.

• Rock Eagle Energy Partners

Energy stocks have been doing particularly well as of late. This corporation pays a strong dividend with a 9.2 percent yield.

There is much more to dividend investing than simple percentages. Just as with all other stocks, it is a good idea to research the company and verify that the dividend will be stable and reliable. It is also wise to maintain diversity in a portfolio and invest in dividend stocks form a wide range of economic sectors.

Have you invested in dividend paying stocks?  What do you look for in a dividend paying company?

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