What are Dividend and Dividend Yield | जानिए Dividend और Dividend Yield क्या होते है

 

What is Dividend?

Dividend investing has become one of the most famous and effective way to invest for the past 27 years. In fact, it has been many times that Dividend investing is a large part of the stock market yield. Unfortunately, if you are a beginner investor, you are less likely to know what a dividend is and how dividend investing works. What is Dividend has been built for beginner investors who want to know how to successfully trade dividend stocks, dividend ETFs or dividend funds.

What is a Dividend?

A dividend is an amount of money paid by a corporation to its shareholders. Dividends are paid with after tax money. According to the financiall theory, a company will issue a dividend when they can’t invest in a new project that meets the shareholder investment return expectancies. Based on this premise, the corporation rather gives money back to its owner (e.g. the shareholder) through a dividend payout.

The shareholder can then use its dividend payout to invest it in another company that will meet his investment return expectancies.

Why Should You Look Into Dividend Investing?

If you want to invest and make profit after a time, dividend investing can be a very interesting way. When you invest, your primary goal is to eventually sell what you bought (company's shares, mutual funds, E.T.F, etc.) at a higher price than you paid for it. Basically, you are thinking to make money with your investment.

 

If you hold regular company shares or mutual fund in your investment account, you must sell them to generate a profit. However, if you hold dividend paying company shares or dividend paying mutual funds, you will earn money while you are holding them in your investment account.

So, you have 2 ways to make money when you do dividend investing:

#1 Earn capital gain by selling your investment at a higher price

#2 Receive  dividend payouts while you are holding them in your investment account.

Is dividend investing different than “regular investing”?

Dividend investing is not actual different than any other regular investing ideas. You can invest in several investment ways such as:

-         Company shares (also called stocks)

-         Mutual funds

-         Exchange Traded Fund (ETF)

The only difference is that the titles you hold in your investment account are distributing a part of their profit to their owner (you!) over a time. However, dividend investors have to keep few factors to consider before making their investing journey.

One must look into dividend metrics such as:

-         dividend growth

-         dividend payout ratio

-         dividend yield

-         ex-dividend date

-         dividend raises or dividend cuts,etc.

 

what are Dividend Raise and Dividend cut 

What are Dividend Raise and Dividend Cut

There is a very delicate balance between the dividends that a company pays to the investors, the shares price of that company, dividend raise and dividend cuts.

Companies that regularly increase their dividends (such as dividend champions) attract a lot of investors. When shopping around for dividend paying companies, the dividend raise chart is very important. You need to find companies that do increase their dividends each year, or your investments will be eroded by inflation. However, it’s not realistic and sustainable, for a company, to increase dividends at unusually high rates.

What is a sustainable rate when it comes to dividend raise?

A dividend raise around 10% yearly covers the inflation and manages to bring you good profits, without endangering the future of the company. A dividend payments growth rate around 5-10 % per year can be considered as standard procedure. But, if a company announces an important increase in dividends payments, this information should raise a little red flag. Sudden increase in dividend payment is not always a good sign: it could be a strategy used by that company to increase the price of shares.

When Dividend raises occur

Dividend increase is a mechanism that companies sometimes use to keep the price of their shares up. Since investors are looking to make more money with their investments, they will look after stocks that are able to increase their dividend years after years.

Therefore, solid companies will be able to raise the dividend payout without busting their dividend payout ratio. If a company sees its cash flow and net profit increasing, it will vote a dividend payout increase in order to share the wealth with their shareholders. When this occur, the dividend payout ratio remains about the same and investors receive more money in their pocket. This is when dividend raises should always occur. However…

Beware of Dividend raises – look behind the numbers

During a recession, there are periods when a company’s stock start going down. A lot of investors will feel the urge to get rid of their shares in this situation and the price will continue to go down. To stop this chain reaction, companies might increase their dividends, to attract new investors and to raise the price of the shares.

There are serious risks associated with this strategy. When a company pays more dividends then it can actually afford, the company may remain vulnerable, without financial resources for growth and development.

There are also companies that finance dividends raise from borrowed money. That’s a huge vulnerability of a company, and you should avoid companies with high debt levels.

Dividend Achievers, Dividend Champions and Dividend Aristocrats

For safe, profitable long-term investments pick companies that have constant, average raises of dividend payments. The companies that, during the last 25 years, maintained a steady raise of dividends are known as dividend aristocrats. Investing a part of your money in companies from this exclusivist group is a good way to make sure you build a strong, safe portfolio.

 

Dividend cuts – when they occur and what they tell you about a company?

Dividend cut is a collocation that all investors fear and want to avoid. However, sometimes companies have to cut the dividend payments to the shareholders, in order to improve the company’s operations or even to save the company from bankruptcy.

If the earnings of a company were far lower then estimated, the only realistic solution for that company to remain competitive on the long term is a dividend cut.

Companies try to avoid it, because it generates a lot of mistrust among shareholders, determining them to start selling stocks, which can cause important financial losses to a company. In most cases, the company stock will drop significantly upon the dividend cut announcement.

But economic turmoil can determinate any company, even those formerly in dividend aristocrats group, to make use of dividend cuts. For example, in 2009, a lot of banks from United States were forced to cut drastically their dividends. US Bancorp cut dividends by 88%, while Citigroup and Bank of America slashed their dividends to just one cent.

A Dividend cut is not a solution preferred by a company’s executives or shareholders, but it’s a decision that sometimes needs to me made. If a company cut dividends, it’s never a good sign as it is usually one of the company’s last resorts. By cutting the dividend, the company knows that it will lost a lot of capital market and interest from investors. Maybe it’s time for you to leave to boat too…

On the other side, a dividend cut means cheaper shares, so if you consider that the company has long term potential; it’s the right time to invest. However, there is a combination of factors that you should really avoid, when it comes to investing your money: dividend cuts, high debt level and low cash flow. This combination is hard to overcome by any company, so place your money elsewhere.

In the end, if you are looking to build a long term growth dividend portfolio, you are better off avoiding companies with low dividend raise and sell companies that cut their dividends.

You can find financial information about a company on the company’s website or use our dividend resources to look over more companies.

What Is a Dividend Yield – How to Calculate Dividends

Interested in investing your money on dividend paying companies? Then, you need to understand notions such as dividend payment, dividend yield, dividend payment ratio, dividend increase or dividend cut. All those numbers are important information, which can help you to make an informed decision, when it comes to investing your money. It’s very hard to compare the performances of different companies, if you don’t have those numbers or you don’t know what they mean.

Dividend yield help you invest your money wise 

The dividend payment allows you to calculate the amount of cash you get, based on the quantity of shares your have. For example, if you have 2000 shares to a certain company, and the annual dividend for a share it’s 0,50$, then you get an annual dividend payment of $1000. Most companies pay dividends quarterly, which means that you will receive $250 every three months.

What is a Dividend Yield?

The Dividend yield is a percentage that shows you how much return you get for the money you invested. Let’s take, for example, Procter & Gamble Company (PG). The average price P&G stocks, in 2010, was around $60. In the same period of time, the company paid dividends of $ 1,80 per share. This means that dividend yield for P&G shares, in 2010, was the report between the annual dividends per share – in this case $1,80 – and the price per share, this being, in our example, $63.  Following the formula  to calculate the dividend yield:

Dividend Yield = Annual Dividend Paid / Stock Price

The Procter & Gamble shares had, in 2010, a dividend yield or 2,3%.

How to use the Dividend Yield

The dividend yield offers you the right instrument to compare different companies. The dividend per share they offer it’s a tool, but not the most accurate one. For example, if you buy shares to ABC company, and each share costs you 20 dollars, but the company offers you annual dividends per share of $1, the dividend yield of that company is 5%.

Let’s take another example, to understand exactly why dividend yield is very important, when you make investment decisions. If another company (XYZ) offers $2 annual dividends per share, while the price per share is $60, the dividend yield is 3%.

When you look at both companies, while the dividend payout in cash is higher with XYZ, the dividend yield is higher with ABC. If your goal is to build an investment portfolio with the highest dividend yield, you should buy shares of ABC company.

Dividend yield is the instrument that tells you how much you get for every dollar you invested. Companies pay dividends quarterly, but dividend yield is always calculated on the yearly payout.

Dividends increases and dividend cuts

When you invest your money in dividend paying company, it’s a good idea to check the long-term evolution of the dividends. You should be looking for companies that increase the dividends every year.  In order to do so, you need to look at 1year and 5 year dividend growth.

If you buy shares to a company now and that company pays $3 in dividends for each share, in 30 years those $3 might not be such a great deal. You need to invest in companies that increase their dividends yearly, and the increase covers at least for the inflation.

If you want to calculate dividends increase of a company, over a certain period of time, you need the dividend history for precedent years. Usually, you can find this information on that company’s website. Here is an example on how you can calculate the growth rate of a company’s dividends.

If, in 2008, you got $3 dividend for each share you owned to a company, in 2009 the dividends increased to $3,80 and in 2010 to $4,50, you have all the information to calculate the growth rate. In 2009, compared with 2008, the dividends increased by two percent (3.80-3= 0.80/100=8%). In 2010, compare with 2009, the growth was only seven percent (4.50-3.80=0.70/100=7%). Now you have to calculate the average growth over the last two years: 8%+7%=15/2= 7.5%.

Sometimes, companies have to cut on their dividends. If they don’t make enough money one year, they will have to reduce their dividend payout they are paying to the shareholders or even give up on paying dividends for that year. Of course, that’s not good news for a shareholder. However, on the long-term, it’s better for a company to consolidate financially and to grow then it is to pay the dividends in a particular year. You can read more on the effect of a dividend rise or dividend cut here.

What is a Dividend Payout Ratio?

Dividend payout ratio is very important when you look at any dividend stocks. In fact, this is part of the 5 most important dividend ratios should you look at. This article will explain you what is a dividend payout ratio, how to calculate it and why it is so important.

What is a Dividend Payout Ratio?

Dividend payout ratio is the proportion between dividends per share and earnings per share that a company pays to the shareholders. This percent tells you the amount of cash that a company pays in dividends, to shareholders, from the total earnings. Here’s the Dividend Payout Ratio Formula:

Dividend Payout Ratio = Dividends per Share / Earnings per Share

A short example will help you understand this notion better. If a company that has total earnings of $4 per share, but decides to keep $3 for investments and future growths and to pay dividends of only $1 per share, to the shareholders, you can calculate the dividend payout ratio yourself: 1$/4$=0,25 – that’s a 25% payout ratio.

Different Company Stage – Different Dividend Payout Ratio

Most companies retain, each year, a part of their earnings for investments, and distribute to the shareholders the rest of the money. Small, emergent companies tend to keep a big part of their earnings for growing, and will pay small, or no dividends at all. Such companies will have small dividend payout ratios. Big, well-established companies, on the other hand, pay a bigger part of their earnings to the shareholders, thus they have high dividend payout ratios. The question is: should you invest in companies with high or low payout ratios? Well, the answer is not as simple as you might think and there are a lot of factors you need to consider.

High payout ratios – things you need to know

If you want to invest you money in dividend paying companies, there is one important question: should you place your money in companies that offer high payout ratios or, on the contrary, in companies that limit the amount of dividends they pay to the shareholders?

Well, your first instinct would be to pick the companies that offer you high dividend payment ratios thinking company are sharing most of their profit with the shareholders.

However, that’s not always or not necessarily the best choice. When it comes to investing money, there are a lot of factors you need to take into account. If you invest in a company that usually pays dividends at high payout ratios, you need to wander for how long that company will be able to continue the payments?

A company that has a 100% payout ratio probably won’t succeed to remain competitive. Distributing all the money to the shareholders, as dividends, means that there is no money left for investments, for development, for bringing in new technologies and for keeping the business competitive. So, a very high dividends payout ratio is virtually impossible to be maintained on the long-term. Sooner of later, that company will either go out of business or will have to stop paying dividends all together for a while.

What is the Perfect Dividend Payout Ratio?

The best strategy to invest your money is to select companies that offer you a decent dividend payout ratio, but still keep a part of the money for future growth. Dividend payout ratios between 30 % and 60 % tell you that you are dealing with responsible companies, which are interested in providing good, stable returns to the shareholders and in the same time to maintain a healthy, solid business running. When you look at the best dividend stocks, most companies able to maintain a solid dividend payout throughout several years will rarely exceed 60% in term of dividend payout ratio.

What low payout ratios mean and when to invest in such companies

When a company decides to pay only a small portion of the profits to the shareholders, as dividends, it means that the company focusing on growing and expand of a bussiness. Generally, that’s the case of smaller companies. Buying shares to such companies may be a good idea, because potential of growth is huge in such companies if fundamental is strong.

Even if you don’t make cash on the short term, there are great perspectives for the future. There is a direct connection between the dividend payout ratio or a company's price of the shares. Companies with low dividend payout ratio might have cheaper shares, while companies with high dividend payout ratio also have little expensive shares.

If you buy cheap shares to a growing company, which doesn’t pay high dividends yet, over time you will enjoy great returns. So, if you are interested in capital gain and long-term investments, don’t ignore dynamic companies, only because they offer you low dividend payout ratios. The best way to make a solid and profitable investments portfolio is to place your money both in well-established, big companies and in small, emergent companies. This way, you’ll enjoy nice dividends from companies with high payout ratios and, in the same time, you have the opportunity of high returns on the long term, with emerging or growing companies.

What are Dividend Payout and Dividend Payout Ratio

Dividend payout is the amount of cash that a firm pays to the shareholders for their stock, distributing, this way, the earnings generated during a certain period of time, usually the fiscal year. Generally, a corporation doesn’t transfer all the earnings to the shareholders, as dividends. Some of the cash is used for investments. The dividend payout ratio is the fraction of the net income that a company pays to the shareholders.

Dividend payout – how you can use it

There are two important ways to use your dividend payout.  The shareholder is free to use the cash as he or she pleases. Once a company closes the monthly quarterly result and calculates the earnings (or net income) the shareholders will also receive all the documentation via mail or by post. They will found out how much cash was generated and the exact amount of money they get for their shares. The investors get the cash through checks or through electronic transfer, directly into their bank account. However, there is another course of action for your dividend payout. You have the possibility to leave the money into an account and to use them to buy more shares, increasing your participation to that company (this is call a DRIP). A good example of constant dividend payout comes from Johnson & Johnson, which in the last ten years maintain a range between 35% and 45%.

What dividend payout ratio tells you about a company

The dividend payout ratio is an important number, which tells you a lot about a company. The number is a percent and represents how much of the earnings for a determined period of time reach to the investors. For example, if you invested in a company and the company announces, for that year, a dividend payout ratio of 40%, it means that you will get 40% of the earnings generated by the shares you own. The rest of the earnings, in this case 60%, will remain in the company and will be use for investments. Generally, big, well-established companies giving return a bigger part of the earnings to the shareholders. Low payout ratio can also lead to future dividend raise. New, emergent companies have very low dividend payout ratio or even zero. However, that is not necessarily a bad thing; it just means that the money is reinvested in the company, generating capital growth. You can read more info on dividend payout ratios and how to calculate it in this article: What is a Dividend Payout Ratio.

How to select the right investments for your needs

If you are looking for places to invest your money, the dividend payout ratio provides you a lot of information. A high dividend pay ratio tells you that the company returns a big part of the earnings to the investors. This type of companies is suitable for you, if you are looking for high current income. If you are aiming for capital growth and you want to pay lower taxes, then you should invest your money on emergent companies, with low dividend payout ratio. They will bring you nice returns on the long term, and, in the mean while, you pay lower taxes for capital gains.

You can buy dividend-paying stocks from the share market

For a profitable investment portfolio, a good strategy is to include some dividend paying stocks to it. This type of stock comes with a lot of advantages. You get cash returns quarterly, whether the stocks of the company go up or down. This way, you are protected against the periodic, inherent turmoil of the stock market. Investing your money in solid, dividend-paying companies is the right strategy for long-term investments. The dividends are not guaranteed, but statistics show that most companies raise their dividend payout ratio over time or at least maintain it. Purchasing dividend paying stocks protect your from most of the stock market investing risks.

Dividend payers are solid, well established companies and, on the long term, most of the returns come from dividends. Any investments strategy should focus on those companies.

DIVIDEND BASICS

What is a Dividend?

(Excerpt from What is a Dividend? article) The word dividend has come to mean cash that is distributed from earnings. Usually, any direct payment from the corporation to the shareholders will be deemed to be a dividend.

How do I buy dividend stocks?

You need to open a brokerage account in order to buy dividend stocks. They are no different than any other stocks on the market.

Do I need a lot of money to invest in dividend stocks?

You can start a dividend portfolio with as little as $1,000.

Do I need a financial advisor to buy dividend stocks?

Financial advisor will usually be able to sell mutual funds and talk about asset allocation. You need an advisor with a broker licence to get stock recommendation.

How dividends get paid?

Dividends are paid via checks by mail, electronic deposits in your brokerage account or reinvested via a DRIP.

What is an Ex-Dividend Date?

(Excerpt from What is an Ex-Dividend Date? Article) The ex-dividend date is the date that’s exactly two business days prior to the date of record. What this means is that the firm that is giving out the dividend establishes and figures out exactly which individuals are entitled to receive a dividend from the company.

Do I need to subscribe to a newsletter and follow some “guru”?

Newsletters or gurus are not to be followed blindly. A good investing strategy based on fundamental analysis is still the best way to buy dividend stocks.

What do transaction fees look like?

If you trade individual stocks, trading cost can be as low as $4.95 to as high as $29.95 per trade (e.g. if you buy it’s one trade and if you sell it’s a second trade).

Besides transaction costs you should not have any other fees related to your account (as long as you are trading 2-3 times per year).

Should I transfer all my investment accounts at the same firm?

If you must leave your financial advisor because he doesn’t have a broker licence, you can transfer your current investments (mutual funds, etf, etc) to a brokerage account firm “in kind”. When you transfer “in kind”, it means that you transfer the account “as is” and you keep your investments. Therefore, you do not trigger any sales or any fees (beside the transferring fees).

You are better off having only one investment account as it makes easier for you to follow your trade and bigger investment accounts could benefits from better trading prices.

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What are Dividend and Dividend Yield | जानिए Dividend और Dividend Yield क्या होते है