What Is Dividend and What Does That Mean For Your Investments?
What is dividend? A dividend is a distribution of company profits paid to the owners of equity (or stock) as a reward for their ownership. The total dividends you receive from the company are called dividends per share. The dividend payout ratio is the percentage of earnings that a company is willing to pay as a cash dividend to its shareholders.
Dividends are one way that equity investors can make money when they own shares in a company. When an investor buys a stock, it typically comes with two types of returns: capital gains and dividends.
Capital gains refer to the increase in value of the stock itself, while dividends are payments made directly from a company’s earnings back to its shareholders. Now you have understood ‘what is dividend?’ Now let’s look at other important things that we should not ignore.
What Are the Advantages of Owning Stocks with Dividend?
Knowing ‘what is dividend’ certainly can’t just stop at the definition. Holding shares in a company that pays you a dividend is a great way to achieve a steady passive income stream. The more established and profitable a company is, the more likely it is to pay a dividend.
When you buy a stock that pays a dividend, you’re essentially getting paid a portion of the company’s profits. And since companies are run to generate profits for their owners, paying a dividend is one way that companies can return profits to shareholders.
Dividends are always paid from company earnings, so they’re considered a “bonus” for owning stocks. This means that companies don’t have to pay dividends, but have elected to pay them anyway.
What Are the Disadvantages of Owning Stocks That Pay Dividends?
One of the disadvantages of owning stocks that pay dividends is that the dividend amount might vary from one year to the next. Company profits (and dividend payout ratios) change every year, so a company may pay a greater or lesser dividend each year. Although dividend yields are often higher on stocks that pay dividends, dividends come with risk.
What if the company goes bankrupt and can’t pay you your dividend? What if there’s a sudden and dramatic change in the company’s industry that results in the stock’s value dropping? Luckily, there are ways to reduce risk when investing in dividend-paying stocks.
When Should You Buy a Stock That Pays a Dividend?
You might want to consider buying a stock that pays a dividend if you’re conservative about your investment outlook or you’re just starting as an investor.
Since dividends don’t have as much potential for growth as stocks with high-growth potential do, dividend-paying stocks are often a good choice for investors who are more interested in preserving the value of their investment than growing it.
If you’re looking to build a steady stream of passive income from your investments, then dividend-paying stocks are a good bet.
When Should You Avoid a Stock That Pays a Dividend?
If you’re a very conservative investor, there may be some circumstances in which you want to avoid buying a dividend-paying stock. This may be the case if the stock’s dividend yield is incredibly high, but the company’s underlying business is unstable or if the company’s dividend payout ratio is very high (meaning the company doesn’t have enough earnings to sustain dividends at the current level).
In general, if you want to invest conservatively, you’ll want to avoid dividend-paying stocks with very high dividend yields because they could be risky.
How to Find Good Stocks With Solid Dividend Yields?
To find good stocks with solid dividend yields, you’ll want to look for stocks in the “Utilities” sector. Utilities are companies that generate their earnings from providing electricity, gas, or water to customers.
Since these types of companies are typically very stable and generate predictable earnings, many utilities offer higher dividend yields than other types of stocks. You can also search for stocks with lower “beta” values. That’s talking about the size of the stock’s volatility. Stocks with lower betas tend to be less risky than stocks with higher betas.