What To Look For When It Comes To Choosing Dividend Stocksby Preston Davis Dec 30, 2022
When inflation rears its ugly head, the search heats up for investments that yield reliable – and worthwhile – dividends. But dividends come in various forms, and some are more dependable than others. It’s well worth knowing which dividends you should consider, and which you should ignore.
How Dividends Are Paid Out
Dividends are payments made by publicly traded companies to their shareholders. It’s important to note that they can serve as a tool for portfolio growth, especially if you choose to reinvest your dividends in additional stock shares. In most cases, dividend payments can serve as a source of income for shareholders of all ages. These types of payments can be especially beneficial for retirees looking to supplement Social Security benefits, pensions, or retirement savings.
Dividends are paid on a regular schedule, usually quarterly, in order to share profits with stockholders. Whether dividends are paid out as cash or additional stock, shareholders will receive a dollar amount or percentage for each share they own. For example, if you own 40 shares and the company pays a $1.50 cash dividend per share, you’ll receive $60 over the year.
Investors sometimes turn to dividend-paying stocks as a means of replacing more conventional fixed-income products included in a diverse portfolio. Some dividend stocks consistently increase their payout annually, which can feel like receiving a yearly pay raise.
The Plus Side Of Dividends
Shareholders who want to receive dividends need to buy the stock before the ‘ex-dividend date,’ which is essentially a cutoff date that serves to ensure the shareholders’ eligibility to receive the payments. Shareholders considering selling their stock shares must hold them until the ex-dividend date in order to receive their dividends.
Companies issue dividends as a means of rewarding investors for holding onto the stock. The disbursement of this regular income has the potential to attract new investors and further drive up the value of a company’s stock price. The amount of money paid out per share (the dividend yield) is determined by the board of directors, which approves all dividend payments.
Choosing Dividend Stocks
When dividends are routinely paid out, it’s regarded as an indication that the company is experiencing a consistent cash flow, has a steady income stream, and is financially stable. It’s not surprising, then, that dividends are viewed as a sign of a company’s successful maturity and financial progress; in contrast, new firms and those that are growing to tend to not pay out dividends as they generally have to apply most, if not all, of their money to expansion and furthering their financial stability.
Financial advisers suggest that investors looking to purchase dividend stock should review a company’s dividend payment track record. Consider taking into account the following factors before making a dividend stock purchase:
• Average percentage yield
• The company’s established history of offering dividends
• The payout ratio (the percentage of the company’s earnings returns to its shareholders); financial experts suggest a 50% payout ratio is most likely to be sustainable
• Overall payment stability or increases