Learn, What is Dividend Investing? Meaning, Definition, and Example!


For those who are still considered greenhorns in the investment world, a dividend is a payment distributed by a company to all its shareholders. For the longest time, dividend investing has been a permanent fixture in wealth building and wealth management programs because of the kind of financial security it provides. An investor and expert financial planner earns in divided investments through dividend payments, which forms part of a company’s profit. Also learned, Mutual Funds, What is Dividend Investing? Meaning, Definition, and Example!

Meaning:

Each quarter, on the dividend declaration date, a firm’s board of directors declares the dividend amount that will be distributed to the firm’s shareholders. Only the shareholders who owned the stock on the dividend record date, i.e. the date that the firm reviews its lists to determine the shareholders of record, receive a dividend. Shareholders who do not own the stock on the dividend record date are not entitled to receive a dividend.

Likewise, investors who buy the stock on or after the ex-dividend date do not receive the firm’s dividend. Usually, dividend investors are interested in a firm’s dividend payout ratio and dividend yield. A dividend payout ratio between 40% and 50% indicates that the firm distributes almost half of its retained earnings to its shareholders while the remaining is invested in the launch of a new product or to lower the short-term debt. The dividend yield may lead to a large cash income.

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Definition:

Dividend investing is an investment approach to purchasing stocks that issue dividends in an effort to generate a steady stream of passive income. Companies distribute cash dividends to their shareholders periodically during their fiscal year, but most issue them on a quarterly basis. “Dividend investing is an investment strategy of only buying stocks that issue dividends thus creating a reoccurring income stream.”

The other profit portion not distributed to the investors will be pumped back into the capitalization used to fuel the operation of the company.
  • Most wealth management and wealth building programs include dividend investing. To place investments strategically, a professional financial planner would be necessary. One who deals with dividend investing would need the expertise provided by a financial planner when playing with the rise and fall of share prices.
  • With dividend investing as part of an individual’s wealth building and wealth management portfolio, a consistent flow of passive income is produced which the investor and financial planner can opt to spend or reinvest in the same venture to increase shares or place in other forms of investment. That is the reason why most retirees love investing in dividends – the supplemental income plus the excitement that market assumption brings.
  • Only when a company has reached a high level of marketing success will it only decide to pay dividends. This means that investing in a company that pays dividends is investing in a stable company. With bigger rewards and very little financial risks, dividend investing is really one of the best wealth building and wealth management strategy options. Dividend investing offers two ways of earning profits: getting dividend payments and increase in share prices which mean bigger return on investment when one decides to sell his shares.
  • With dividend investments, one gets a better deal with his money. It improves his wealth building and wealth management portfolio which raises his assets worth. Plus, he still retains part ownership of the company while collecting profits at the same time. An investor, as well as a financial planner, has the option of increasing his number of shares by reinvesting his dividends. He does not even have to shell out extra cash to buy new stocks and shares.
  • Investments in dividends can function as a barricade against inflation. Dividends can offset losses in other business as a result of the increase in the prices of products. High prices mean more earnings which also translate to bigger dividends.
  • Dividends are typically taxed lower compared to regular income. This means more savings on taxes paid to the government.

Today, a lot of senior citizens rely on their investments on dividends in sustaining them with their daily needs. The dividends coming from stable companies are as consistent as night and day and it provides the opportunity of receiving cash right out the investments that they made without having to cash in on their shares. Or, they can beef up their shares by reinvesting the profits that they earn when they feel they do not need the extra cash at the moment (as a trusted financial planner would often say).

For Example:

A steel manufacturing firm has released its quarterly results and has a net income of $250 million. The board of directors decides to pay $120 million in cash dividend and reinvest $130 million in lowering its short-term debt. This means that the firm’s dividend payout ratio is dividend / net income = $120 million / $250 million = 48%.

The board of directors declares a quarterly dividend of $0.95 per share, reaching an annualized dividend of $3.8 per share. The stock currently trades at $88; therefore, the dividend yield of the stock is dividend / stock price = $3.8 / $88 = 4.32%. A shareholder that holds 10,000 shares will be compensated with 10,000 x 4.32% = $432.

On the ex-dividend date, the stock price declines to adjust to the dividend paid. Therefore, the firm’s stock that trades at $88, and pays a quarterly dividend of $0.95 per share, ceteris paribus, the stock will open at $88 – $0.97 = $87.03 on the ex-dividend date.


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