For every serious investor, one of the most important parts of their investment is the investment returns known as Dividends. When a company earns a profit, they have three options available to them. These options include: reinvest it in the business, pay the profit out to their shareholders, or invest in share repurchases and debt reduction. When a portion of the profit is paid to the shareholders, it is referred to as a dividend.
Dividends are normally paid out on a quarterly basis and it is often a cash payment either through mail or directly deposited into a shareholders account. The goal of every investor is to be able to have high cash dividends to allow the investor to enjoy a comfortable income. Basically a shareholder would ultimately prefer to live off the dividend payouts that they receive.
There are many benefits to including dividend paying stocks in a stock portfolio. For instance, companies who pay out dividends are usually more financially stable. Companies that are able to successfully manage their cash flow will normally maintain and increase their dividend payouts long term. Dividends also help reduce volatility as dividends help decrease the potential decline of a company’s stock price. As well, dividends are advantageous for prudent investors because they provide income and the tax charges on dividends are relatively favorable.
Income investing is not about gambling your money, but protecting your money. When creating an investment portfolio that includes dividend paying stocks, there are a number of factors investors should consider so that they pick the best possible stock. For instance, a good stock choice is one where the company pays a dividend payout ratio of 50% or less. The remaining profits are then invested back into the company for future growth. Many experts believe that the recent near collapse of Wall Street may not have occurred if banks had just decreased their dividend payout ratios. Another good stock pick is one where the company pays a dividend yield of between 3% and 6%. Also, the company should have a history of generating profits and increasing its dividends. As well, a company should have a high return on equity that includes very little or no debt. This will ensure the company has a cushion if there is a downturn in the economy.
As a shareholder, an investor is entitled to a share of the company’s earnings or profits. Companies will use their dividends to pass on their profits to their shareholders and they offer a reliable return on a low-risk investment. Investing in high dividend paying stocks is not a difficult task when you understand how dividends work and the factors that companies consider when they set specific dividend payouts.
As a company grows, the dividends themselves may grow, making them even more valuable to the investor. With a large portfolio of dividend stocks, investors will be well positioned to make a lot of money in dividends for income, or as additional income for retirees, or use to expand a business.
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Value manager John Buckingham (CIO, Al Frank Asset Management) says dividend-paying stocks are the best bet for a tentative market in this first part of a tw…
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