Dividend Investing is a method of buying securities that pay dividends in order to receive a regular income from your investments. This income is in addition to any growth in the portfolio as its holdings gain value. In this article, we will gain a better understanding of the same.
Dividends are payments that a company makes to its shareholders. When you own stocks that pay dividends you are getting a share of the profit of the company. This permits you to receive a team of income on top of any capital appreciation i.e. growth in your portfolio market value.
For instance, suppose you invest in a company that pays a 3% dividend per share. You own one share of the company worth Rs 100. In this case, you are entitled to receive Rs 3 as dividend.
Buying securities that pay dividends can reward you over time as long as you make smart buying choices. Some companies may have a dividend reinvestment place often referred to as DRIP. With a DRIP< you can opt to reinvest your dividends to buy more shares instead of taking them as a form of cash. This can be a good and wise plan when your dividends are low or small, either because the company is growing or because you do not own much stock.
HOW SAFE ARE DIVIDENDS?
While investing, try to look for dividend safety. This means how likely it is that a company will keep paying dividends at the same rate or higher. While some entities assess and rank dividend safety, investors can also do their own analysis and research to gain better understanding. All you have to do is run a comparison of earnings to dividend payments.
If an entity earns Rs 100 Cr and pays out Rs 90 Crs in dividends, you will make more of a profit than you would if it only were to pay Rs 30 Cr. On the other side, if it pays out it will be able to keep paying at this same high rate.
In dividends lowered dividends lower the income. The 30 Crs payout could also decrease in this case but by a lower percent.
Dividend safety is also determined by how comparatively new or risky an industry is. Even if a company has a low DPR (Dividend Payout Ratio). Your dividends payment will likely be less safe if the industry is not stable.
Look for dividends that are deemed to be qualified in order to get few benefits related to tax. Most income from dividends is taxed as normal income but qualified dividend stocks held for a longer tenure of time are taxed at a lower capital gain tax rate. If you purchase some stocks to get the dividend payment, and then you want to sell them in the short term i.e. quickly, you will have to pay your normal tax rate on that income.
STRATEGIES FOR DIVIDEND INVESTING
Good dividend investors tend to focus on either a high dividend growth rate or high dividend yield approach strategy. Both serve different roles in a portfolio. With the high yield approach, the priority and focus is on slowly growing companies that have high cash flow. This allows them to fund large dividend payments and it will provide you with a new income stream.
Using the high dividend growth rate, your priority and focus is on purchasing stock in entities that pay low dividends but are growing quickly. This means you are purchasing profitable stocks at a lower rate and making a huge amount of income over a 5 to 10 year time horizon.
Various investors may prefer one approach over the other. It all depends on whether your vision or goal is immediate and stable income or whether you prefer long term profit and growth. When choosing a method, decide what level of risk you personally prefer. Think about how long you are willing to wait for your dividends to produce the desired income level.