An investor can earn income simply by owning shares of companies. But how do we get access to the best-yielding dividend stocks?
What are dividend stocks?
One way to make money on securities is to buy them and then sell them. However, this should only be done if you expect the share price to rise. But it’s not as simple as it looks. Some companies periodically pay dividends – distributing part of the profits among shareholders.
The payment of dividends is the responsibility of any company. It happens not at special request, but according to the established rules. A lot depends on the position of the company. The stakeholders decide whether or not to pay dividends and in what amount, at the general meeting.
What should you pay attention to?
In order to assess the chances of potential income through dividends, you need to look at how consistent companies are at paying them. An organization that has a reputation and years of experience in paying dividends may be more attractive than one that does it only for a year or has irregular payment periods.
In other words, it is necessary to assess the stability and commitment of the company to its principles of dividend policy. Please note that such policies can change over time. Therefore, you need to be prepared for changes and monitor them.
Payment dynamics
The size of the dividends matters. But it is too obvious a criterion that everyone pays attention to. It is also important to analyse how the indicators change over the course of months or several years. If the value of the shares is constantly rising, then these are favourable conditions. From this, it can be concluded that the organization is operating at a profit, which entails the possibility of income generation (though not always). Moreover, the income can increase each time.
A common mistake of beginner investors is buying assets of the company at a large one-time dividend. It is necessary to understand where the company receives money for payments (it is possible that the funds are borrowed) and what prospects are possible.
Dividend income
We are talking about the ratio of the annual dividend per share to the price of this share. You can calculate it using the formula:
Profit = share price / dividend per share × 100%
It is no secret that if a company pays 5 percent, it is much more significant than a company paying 1% -1.5%.
Dividend gap and its closure
The transfer of bonuses occurs on a certain day, which is known in advance. The payment day is a kind of dividend interval: on this date, a list of shareholders who will receive the money is formed. Next day the stock may decrease in price by the amount of the dividend and then rise again. This action is called the dividend gap.
It is important that after this action, the stocks start to rise. And the faster they grow and reach the level at which they were before, the faster investors make a profit. If the shares fall in price, then the received income only covers the losses from the fall in the value of the shares, and there can be no talk of any real profit.
Dividend gap is a very important element in investments. Here it is worth knowing that you can buy shares more expensive than usual. It is important not to fall into this period of time, when the security is still worth more than usual, and it will not work to make a profit in this time period.
The conclusion is simple: you need to buy stocks of enterprises before the date of fixing the register of shareholders who will receive the money. In this case, it is better to have time before the securities start to grow.
Financial security
We have already said that the reputation of the company is important. It is also worth analysing its financial position and predicting whether the company will be able to make a profit in a year and what it will be able to give to its shareholders.
For example, you could estimate the amount of debt. It is logical that debts will not allow paying profits. First, profits will start to cover loans or borrowings.
It’s also worth remembering that stocks of dividend-paying companies tend to appreciate more slowly than those that do not have such a function. The second type of company invests profits in development. They do not pay their investors, so such enterprises have the opportunity to grow faster, which can significantly affect the value of securities.
Therefore, if you want to receive passive income in the form of dividends, you should choose large, well-known and reliable corporations. Investing in small or young companies can provide an opportunity to capitalize on fast-growing stocks.
Nuances of stocks
Stocks can be:
- Simple
- Privileged
In the second case, some features are added. For example, there is an option to include in the company’s charter a fixed income for its shareholders or a certain percentage of the value of the security. It may allow investors to earn money even in cases where such payments are not provided for ordinary stocks. However, let’s repeat, it depends on the prescribed conditions, so you need to carefully read the company’s charter and predict your possible profit.
On the other hand, sometimes preferred stockholders will have no rights if the future of the company is decided. These investors do not have voting rights. But if a person owns small stocks, it will not significantly affect the investment portfolio.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
