There are several types of investors out there with different investment preferences and strategies. Some prefer high risk and high reward investments that can help them get a considerable gain in a short span of time. Although risky, investment choices such as trading shares in the market, can help you cover short term expenses and bring in earnings on your invested capital that can be hard to earn elsewhere. But despite these alluring claims, these options may not suit all types of investors. For those who prefer low risk investment products, the dividend route can be more appealing. Dividend stocks can seem a bit tricky at first, but as long as you understand the theory of dividends, you can make them an essential part of your monetary inflows.
This article talks about how dividends are the ultimate tool for investors.
Table of Contents
When you invest in a company, you become its shareholder. A dividend is a payment that the company pays you for your investment. So, for instance, if company ABC announces a dividend of $10 for 1 share, and you hold 20 shares at the time, you will earn a dividend of $200. The more shares you own, the higher would be your dividend income.
Dividends can be an integral part of your income. Normally, companies pay dividends four times in a year. This translates to four income opportunities in a year and the chance to earn money that can cover several types of expenses. There are also some companies that pay monthly dividends, making them ideal for retirees who may be looking for a continuous source of income. But other companies may pay dividends only once a year. Moreover, some dividends can have a different payment amount each time. It helps to know these things in advance to make the right investment choice in the first place.
Another important thing to note is that there is no fixed limit or threshold that companies use for paying dividends. The amount of dividend that a company generates would depend on the size of the company, its profit margins, annual turnover, industry type, market conditions, etc. If you invest in a small or upcoming company, you may not receive high dividends, as in such a case the primary focus of the company would be to focus on its growth and development. Therefore, investing in a well-established business could be a better choice as the chances and frequency of higher dividends are a lot more.
Telecom stocks generally have a high dividend that can range between 4% and 5%. Real estate investment trusts (REITs) or royalty trusts that primarily deal in mortgage securities can offer dividends as high as 10%.
Dividends can offer many benefits to investors, such as:
As beneficial as it can be to invest in dividend paying stocks, there are some flags that you should be aware of, such as:
An important measure that can help dividend investors gauge such a possible situation in the future is the pay out ratio. The pay out ratio is a measure of how much a company pays in dividends. This figure is always seen in association with the company’s profits. So, if the pay out ratio is more than the company’s profits, there is a good chance that stakeholders may not receive their dividend income, as the company would suffer a loss.
A simple yes can suffice to answer this question, however, it is still important to know and understand what dividends bring to the table. Dividend stocks are generally considered to be a safe option for people who want to generate real income from their portfolios. Real income in this regard, refers to realized gains. While stock market prices may escalate, your real gains are only credited to your account when you sell the stocks you own. However, in the case of dividend stocks, regular dividends are paid to you.
This makes dividend stocks a real winner among the list of many investments. They are tax efficient and provide steady gains, thereby lowering the risk and volatility of your portfolio. However, they are not guaranteed income and can vary over time. Having said that, past performances do indicate that dividend stocks have performed better than non dividend paying stocks even in bear markets.
The final consideration to investing in dividend stocks should be made after a careful study of their merits and disadvantages. A financial advisor can help in this regard.
Dividends are the ultimate tool for investors, if used wisely at the right time and stage. Moreover, it is also important to use dividends for further wealth creation opportunities to truly maximize their gains. An ideal diversified portfolio contains well distributed risk and dividend stocks.
If you are looking to invest in dividend paying stocks, you can contact a financial advisor in your area who can help you to pick the right options.
A team of dedicated writers, editors and finance specialists sharing their insights, expertise and industry knowledge to help individuals live their best financial life and reach their personal financial goals. We believe that there is no place for fear in anyone's financial future and that each individual should have easy access to credible financial advice.
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