Is dividend investment a good strategy?

Many novice investors do not understand what dividends are—because they are related to investment—especially for individual stocks or mutual funds.Dividend is a payment part The company’s profits are given to eligible shareholders, usually issued by listed companies.

However, not all companies pay dividends. Usually, the board of directors will determine whether its particular company needs dividends based on various financial and economic factors. Dividends are usually paid to shareholders in the form of cash distributions monthly, quarterly or annually.

Key points

  • Dividends are the discretionary distribution of profits given by the company’s board of directors to its existing shareholders.
  • Dividends are usually cash paid to investors at least once a year, but sometimes quarterly.
  • Stocks and mutual funds that distribute dividends may have good financial foundations, but this is not always the case.
  • Investors should pay attention to extremely high yields because there is an inverse relationship between stock prices and dividend yields, and the distribution may not be sustainable.
  • Dividend-paying stocks usually provide stability to the portfolio, but usually do not outperform high-quality growth stocks.

Dividend basics

Shareholders of any particular stock must meet certain requirements before receiving dividend payments or distributions. You must become a “shareholder of record” on or after a specific date designated by the company’s board of directors to be eligible for dividend payments. Stocks are sometimes referred to as “ex-dividend transactions,” which simply means that they are traded on a specific date and are not eligible for dividends. If you buy or sell stocks on the ex-dividend date, you will not receive the latest dividend payment.

Now that you have a basic definition of what dividends are and how they are distributed, let us focus in more detail on what you need to know before making investment decisions.

What is the dividend yield?

This may be counterintuitive, but as the stock price rises, its dividend yield will actually fall. The dividend yield is the ratio of the cash flow you get for every dollar you invest in stocks. Many novice investors may mistakenly believe that higher stock prices are associated with higher dividend yields. Let us delve into how the dividend yield is calculated so that we can grasp this reverse relationship.

Dividends are usually paid per share. If you own 100 shares of ABC Corporation, these 100 shares are the basis for your dividend distribution. Assume that ABC Corporation is acquired at a price of US$100 per share, which means that the total investment is US$10,000. ABC’s profits are unusually high, so the board of directors agreed to pay its shareholders $10 per share each year in the form of cash dividends. Therefore, as the owner of ABC Company for one year, your continued investment in ABC Company will receive a dividend of $1,000. The annual yield is the total dividend amount ($1,000) divided by the cost of the stock ($10,000), or 10%.

If you change to buy ABC Corporation at a price of $200 per share, the yield will drop to 5%, because 100 shares now cost $20,000 (or your initial $10,000 will only get you 50 shares instead of 100 shares) ). As shown above, if the stock price goes up, the dividend yield goes down, and vice versa.

Dividends are part of the company’s monthly, quarterly, or yearly profit paid to eligible shareholders. Generally speaking, a company’s ability to pay dividends is a sign of a company’s good health.

Evaluation of dividend-paying stocks

The real question one must ask is whether the dividend-paying stock is a good overall investment. Dividends come from the company’s profits, so it can be fair to assume that in most cases, dividends are usually a sign of financial health. From the perspective of investment strategy, buying established companies with a good dividend history can increase the stability of the investment portfolio. Assuming that the stock price does not change after one year, your $10,000 investment in ABC Corporation, if held for one year, will be worth $11,000.In addition, if the stock price of ABC Corporation is $90 one year later You bought the stock at a price of $100 per share, and your total investment after receiving the dividend is still break-even ($9,000 stock value + $1,000 dividend).

This is the charm of buying dividend stocks-it helps to cushion the actual stock price decline, but also provides an opportunity for the stock price to rise Plus A stable source of income from dividends. This is why many investment legends such as John Bogle, Warren Buffett, and Benjamin Graham advocate the purchase of dividend-paying stocks as a key part of the total “investment” return on assets.

Dividend risk

During the 2008-2009 financial crisis, almost all major banks cut or cancelled their dividends. For hundreds of years, these companies have been known for consistent and stable dividend payments every quarter. Despite their legendary history, many bonuses have been cut.

In other words, dividends are not guaranteed and are subject to macroeconomic and company-specific risks. Another potential disadvantage of investing in dividend-paying stocks is that companies that pay dividends are usually not high-growth leaders. There are some exceptions, but high-growth companies generally do not pay large dividends to their shareholders, even if they are significantly better than most stocks over time. Growth companies tend to invest more in R&D, capital expansion, retention of outstanding employees, and/or mergers and acquisitions. For these companies, all earnings are treated as retained earnings and will be reinvested back into the company instead of paying dividends to shareholders.

It is equally important to be wary of companies with extremely high yields. As we know, if a company’s share price continues to fall, its yield will rise. Many novice investors are made fun of buying stocks just because of the potentially generous dividend. There is no specific rule of thumb as to how much dividends are paid out.

special attention items

According to market conditions, the average dividend yield of S&P 500 companies has historically fluctuated between 2% and 5%. Generally speaking, it is worthwhile to do your homework on stocks with a yield of over 8% to understand the true situation of the company. Conducting this kind of due diligence will help you distinguish between those companies that are truly in financial distress and those that have temporarily fallen out of favor, thereby providing a good investment value proposition.

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