Dividend Investing
Dividend Investing is a process of purchasing stocks that pay dividends to receive a regular stream of profit from your investments. These dividends provide income or profit to investors. It also determines growing companies that constitute a solid investment in their stocks.
Dividends have been around for decades and have become a popular investment for many people. However, it can tough to research what good companies you can invest in or what products are worth your money and time.
Before you invest in dividends, you must first find a platform to invest in. A highly recommended platform is M1 Finance. It is a commission-free platform that lets you easily create a dividend investing portfolio.
Knowing Dividends
Dividends is the allocation of a company’s earnings to its shareholders. It is a type of payment that is created by publicly listed companies as a bonus to its investors for placing their income on ventures. It is also a method of returning a company’s profit to its shareholders.
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It mostly means as an amount per share and is often compensated by investors in cash. It can also be paid depending on the interval of the company board’s decision. For instance, a payout of dividends might be a dollar per share. Apart from cash payments, it can also be paid using stocks.
Importance of Dividends in Component of Returns
Most people assume that dividends are insignificant at first. However, They are originally created by the total return of the S&P 500 and other various large stock market indexes hence making it a very significant part of component returns.
In fact, research about the impact of dividends on the S&P 500 index from December 1960 to December 2018 presented that about 82% of the total return of an index resulted from reinvested dividends.
Dividend Yield and Dividend Growth
There are two reasons why Investors invest in dividends. These includes:
Dividend Yield
To get dividend yield, you must divide the annualized dividend stock payout by its recent share price. If the payout for it was during the last quarterly, then it will be equivalent to times four. Due to the movements of the stock’s price, the dividend yield also changes every day.
High dividend yield functions as both an increased payout and a decrease in the stock’s price. To reach a stock that has high yields, investors must look ahead to the dividend yield to make sure that they understand why it is high and also know if its payout is sustainable.
A great example of a sector that has a high yield is utilities because it has a steady cash flow and usually has some ownership in its area. Though its share price may not move often, it still has a stable dividend payout.
Dividend Growth
Dividend growth is another type of dividend investing wherein it seeks the stocks of various companies that have a strong record of increasing their dividend payout per share annually. Most companies have dividend growth and well-managed and have a great financial status.
To track dividend growth, a company must have the ability to maintain and increase its dividend payout annually hence generating a stable cash flow. So, whether you invest in a company that has increasing payouts or have a high yield, dividend investing is still the strongest way to produce a stream of profit from your portfolio.
Ways to Invest in Dividend Stocks
If you are ready to invest in dividend stocks, there are various options that you can consider in investing. Below are some
Individual Dividend-Paying Stocks
This type of strategy depends upon an investor’s financial situation and investment strategy. This is because investors are able to purchase individual dividend-paying stocks. An important thing to always consider is whether or not you can create a diversified portfolio of individual stocks coming from this track.
There are many investors who are looking forward to creating a stream of income by making portfolios of individual dividend-paying names. However, they are still affected by the movement of the market hence why you should still proceed with caution.
Mutual Funds and ETFs
There is a wide range of Mutual Funds and ETFs that focuses on dividend stocks from a dividend growth or a yield perspective. These includes the following:
- Vanguard High Dividend Yield Index Fund (ticker VHDYX)
- ProShares S&P 500 Dividend Aristocrats ETF (ticker NOBL)
- Vanguard Dividend Appreciation ETF (ticker VIG)