Dividend Investing

Dividend investing is a method of buying stocks that pay dividends in order to receive a regular income stream from your investments. This income is in addition to any growth in your portfolio as its stocks or other holdings gain value.

Dividends are payments a company makes to shareholders. When you own stocks that pay dividends, you are getting a share of the company’s profits. This allows you to receive a stream of income on top of the growth in your portfolio’s market value. For example, let’s say you invest in a company that pays a 3 per cent dividend per share. You own one share of the company, and shares are worth $100. In that case, you would receive $3 in dividends. Buying stocks that pay dividends can reward you over time, as long as you make smart buying choices.

Some companies may have a dividend reinvestment plan, often called “DRIP.” With a DRIP, you can choose to reinvest your dividends to buy more shares, instead of taking them as cash. This can be a wise plan when your dividends are small, either because the company is growing or because you don’t own much stock. When 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 companies assess and rank dividend safety, you can also do your own research to learn more. All you have to do is compare earnings to dividend payments.

If a company earns $100 million and pays out $90 million in dividends, you’ll make more of a profit than you would if it only were to pay $30 million in dividends. On the other hand, if it pays out $90 million in dividends, and profits fall by 10 per cent, it won’t be able to keep paying at this same high rate.

This, in turn, lowers your income. The $30 million payout could also decrease in this case, but by a much lower percentage. In many cases, companies that pay 60 per cent or less of their earnings as dividends are safer bets. This is because they can be counted on for predictability.

Dividend safety is also determined by how risky or new an industry is. Even if a company has a low dividend payout ratio, your dividend payment will likely be less safe if the industry isn’t stable. Look for companies that have histories of stable income and cash flow. The more stable the money coming in to cover the dividend, the higher the payout ratio can be. Good dividend investors tend to focus on either a high dividend yield approach or a high dividend growth rate strategy.

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