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Why the heck should I learn about dividends? They’re only worth like 30 cents! That’s literally nothing!
We have seen this question a lot so I wanted to make time to go over what dividends are in detail because dividends can be an important part of your investment strategy when achieving financial success.
Dividends are a great way for you to begin earning exponential growth on your investments.
Understanding Dividends
So, what even is a dividend?
A dividend is when a company shares a small portion of its profits with its shareholders.
When you purchase a stock through your brokerage apps like TDAmeritrade or Webull, you are officially considered a shareholder of that company. And if you hold that share for long enough, that company will reward you with a payment in the form of a dividend.
The amount a company pays in dividends usually reflects the value of that company along with its net profits throughout the year. When a dividend-paying company earns profits throughout the year there are usually two things they do with their earnings.
They reinvest their earnings back into the growth of their business.
Pay Dividends to their shareholders.
Some companies like AT&T for example will prioritize their dividends even if they didn’t make a huge profit in the past year. That’s because AT&T is smart and they understand that part of the value of a company is determined by its reputation for paying dividends.
Dividend payments are determined by a company’s board of directors. A Company’s board of directors can choose how a dividends payout rates along with how often they want to pay these dividends. Dividends can be paid at a scheduled frequency throughout each year. This could mean that you can be collecting dividends once a year, quarterly, or monthly.
Stocks That Pay Dividends
Usually, well-established companies will be more reliable when it comes to dividend payments. Not all dividends are created equal. So not all companies will be able to pay you dividends. Companies in these essential sectors are likely to have more reliable dividend payments.
Oil and Gas
Bank and Financial
Healthcare
Utilities
Oftentimes companies in the technology sector do not pay dividends. For example, companies such as Tesla and Facebook do not pay dividends because they reinvest most of their profit back into the growth of their company. So, just because a company is a blue-chip stock, does not mean it will be paying dividends. Overall, whether or not a company chooses to pay dividends is going to be based on their own goals. So if you are looking for a dividend-paying stock, you will have to do extensive research.
What To Watch Out For
Not all dividend-paying companies are reliable. A good dividend investing plan is one that uses a reliable company that has a history of always paying dividends on their dividend payout dates.
A common misconception about dividends is that you should invest in stocks with high dividends. But this is not always the case.
Some companies like start-up companies will promise a higher dividend payment as an incentive for you to purchase a share of their company. A company can choose to pay their shareholders however they please, but if they are not performing well, then this can be a risk to your overall investment.
Yes you should want a higher dividend payment but it’s important to remember that all that glitters is not gold.
When you are researching what dividend-stock to invest in, don't automatically purchase the stock with the highest dividend yield. Do thorough research and look at the history of the company’s performance.
Important Dividend Dates to Know
There are four important dates that occur before a dividend is paid to a shareholder.
1. Declaration Date
The Declaration Date is the date that the board of directors announces the payment of a dividend. This announcement includes the amount of the dividend along with the payment date.
2. Ex-dividend Date
This is probably the most important one you will need to know if you want to benefit from a company's dividends. The ex-dividend date is issued by the stock exchange and not the company itself. This date is essentially a due date for your purchase of a share. If you purchase a share after the ex-dividend date, then you will not qualify for the payment.
3. Record Date
When an investor purchases a stock, it usually takes about two days for the share to officially be on record with the company. The Record Date is the date that your share purchase needs to be on record so you can qualify for the dividend payment. Usually Record dates are one day after the ex-dividend date.
For example, if your ex-dividend date is November 19, 2020, then the Record Date will most likely be November 20, 2020. If your investment was on Nov. 19, then you may miss the Nov. 20th date since it takes two business days to process your investment.
Sounds kind of confusing but basically all this means is don’t procrastinate on purchasing a share. Figure out the ex-dividend date, then purchase your share/shares a few days before that.
4. Payment Date
The date that a dividend is paid to shareholders. Dividend payments can be physically mailed or electronically transferred to the accounts of the shareholders.
Why Dividend Investing is a Good Strategy
Dividends are passive income. You are literally being paid for holding a share of a company. The more shares you purchase the more dividend payments you receive. If you choose to reinvest these dividends, then your shares will continue to grow exponentially.
So in addition to benefiting from the growth of a stock investment, you can also be paid more and more every year through dividends. It's also possible to be paid a couple of hundred dollars or even thousands of dollars in dividends per month if you really tailor your strategy around dividend investing. This means you can potentially live off of dividend payments.
Dividends take years to truly benefit from. So dividends should not be 100% of your focus when you are investing-especially as a beginner. But don’t underestimate dividends and learn to use them to your advantage.
As always, it is important to educate yourself on all things personal finance so you can make a long term strategy for yourself.
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