Dividends are a small amount of money paid out by a company every year. The idea is that if you own a share in that company, you’re entitled to a small piece of their earnings as a return on your investment. This gives a company an incentive to keep putting their money to work and make sure that they can pay out the dividends they owe to their shareholders.
Dividends are common in the stock market, but how do companies decide how much to pay? The answer isn’t easy to find since there are many different rules in place, with some set by the government and some by the company itself. This can make it hard to predict how much your stocks will pay you each year, but it is possible to figure it out if you have the patience. The first thing to do is find out whether the company is paying dividends.
One of the key tenets of investing is to participate in a company’s earnings. That is, you buy its stock because you expect future earnings to grow. When a firm’s earnings grow, the company will usually pay out more dividends. But what are the benefits of choosing a dividend-paying stock? First, you get more income. Second, you get a regular and predictable cash flow. Finally, you get a “double dividend” where they are reinvested to yield more income.
Dividends: The Good
Provide Reliable Income Stream
Dividends are a great way to provide reliable income for investors. They’re also one of the best ways to save for retirement. They are cash payments that companies make to shareholders. They are usually the same amount each year and are paid out in proportion to the number of shares each shareholder owns. A small number of companies do not pay out dividends at all but instead reinvest all of their profits back into the business.
Protection From the Stock Market
In the stock market, dividends are payments made by a company to its shareholders. They are a good thing—they add to the total value of a company and help lower the amount of debt on its balance sheet. The amount a company pays out as dividends is known as its “dividend payout ratio,” and as you can see, it’s traditionally above 60% for large companies.
Diverse Fluctuation
The last few years were the best for dividend investors, who saw the highest yields of their careers: the S&P 500 dividend yield was 4.4% in 2015 and 2016, 4.5% in 2013, and 4.6% in 2012. Yet, these last few years have also been the most volatile, with dividend yields fluctuating between 3.3% and 4.3% on an annual basis. The good news is that while the dividend yield has been rising, the stock market’s volatility has been decreasing, and it has been growing faster than the volatility. This trend is expected to continue.
Dividends: The Bad
Producing Dividend Traps
Dividends are a great way to raise a company’s income and cash flow. They can also be a killer trap for investors who believe in the stock and try to sell it too early. There are many different ways to measure a company’s profitability, and the word “dividend” is used to describe whatever the company pays out to its shareholders. While some companies pay out dividends to the tune of 5 to 15 percent, others prefer to hike the payout by a few percentage points to as much as 30 percent.
Small Potential for Huge Gains
Everyone knows that dividend stocks are attractive, but few investors understand how to pick good stocks to buy, and even fewer realize how much they can gain.
Detach Between Dividends & Business Growth
Most dividend investors are happy to pay a small price for the peace of mind provided by receiving income from their stocks. But that peace of mind doesn’t last forever. Eventually, the dividends stop, and the stock price starts its decline. Then, the investor has to figure out whether he should reinvest them or he should take the money and run.
Many investors believe that dividends are the best form of return on investment, but there are some drawbacks getting in their way of getting the best dividend income possible.
