Stocks are one of the best ways to build wealth because they have great returns over the long term. A stock is simply a security that gives ownership over a small part of a company. Shares are simply smaller units of stocks that can be bought and sold as part of an investment strategy or portfolio. Investors can buy regular shares or dividend stocks. In this article, we will be looking at what you need to know about dividend stocks.
What are Dividend Stocks?
A dividend is a sum of money paid out to investors at the end of a certain period, typically at the end of a calendar or financial year. Many companies choose to share their profits with their shareholders as dividends. In some cases, a company can also use reserve money to pay dividends if it does not have enough profits to do so. Dividends are typically paid out in cash, but they can also be paid out in other ways.
Types of Dividends
When a company offers a cash dividend, the amount you get is the total sum decided upon divided by the total number of shares issued. This is known as the dividend per share, and it is the number announced by companies when they decide to pay out a dividend. To know what your dividend payment is, you take this number and multiply it by the number of shares you own.
A company can also offer property dividends. This is a dividend paid out in the form of an asset which can include a plant, property, equipment, or other assets.
Stock dividends are extra shares offered as payment. The number offered depends on the current number of shares offered plus their current price. A scrip dividend is a promise to pay a dividend payment at a later date.
Liquidating dividends are paid out when a company is about to shut down. Here, the company sells off all its assets (liquidates) and divides the sum amongst its shareholders.
Choosing a Dividend Stock
Because dividends can give you a predictable income, they are very popular amongst investors. But how do you choose one? You can start by checking out what dividend shares other people are buying.
These people have done the research for you and know the best dividend stocks to invest in. Because of this, they are a reliable source of information. You can look at an up-to-date list of the most popular dividend stocks with high yields to know which one to pick.
If you decide to do the research yourself, you should check the dividend yield of different stocks. A higher yield means you get a better payout. However, this is not the only thing to check because market fluctuations can cause the yield to go up and down, even when the dividend per share remains the same.
You should also ensure the company is established and has a good history of paying dividends. Companies that have paid dividends annually for over 25 years without missing one are known as dividend aristocrats so you can be sure you will get a payment as long as you hold their stock.
Growth Investing
The other thing to look at is the growth potential of a company behind a stock. The growth potential is informed by the likely future growth of the company. Past performance may be great, but you need to be sure the company will keep growing, which means the dividends will too.
This is known as growth investing, where your investment decision is guided by the potential growth of a company, its stock price and dividend payouts.
Every investor should have some dividend stocks in their portfolio. Although the payments may be small for those with few shares, it is still a likely income as long as you choose the right company and stocks.
