You can get paid simply for owning the stock.
What are dividend stocks?
One way to make money on securities is to buy them and then sell when they become more expensive. But that’s not all. Some companies periodically pay dividends – they distribute part of the profits among the shareholders.
The payment of dividends is a right, not an obligation of the company. Much depends on the financial position of the joint-stock company. We closed the financial period at a loss – there is nothing to divide. We decided to invest in development and directed all the profits on this – and again nobody will get anything.
Read also: 8 Common Reasons Why Your Salary is Not Growing.
Whether to pay dividends or not, and in what amount is made by the shareholders at the general meeting, they are based on the board of directors’ recommendations.
Therefore, if you want to buy shares to receive dividends, you need to assemble your portfolio correctly.
What to look for when choosing dividend stocks
History of dividend payments of companies
To assess your chances of receiving dividends, you need to look at how often the organization provides them.
An issuer that pays dividends for 10 years in a row will be more attractive than one that does it for just two years or periodically pauses and then resumes payments.
In other words, it is necessary to assess the stability and adherence of the company to its principles of dividend policy. You can usually find the information you need on the joint-stock company’s website in the section “For Investors.” It should be borne in mind that the dividend policy is subject to change. Therefore, it is worth re-reading it periodically, advises Igor Feynman, an expert on personal finance and investments.
Dynamics of dividend payments
Of course, the size of the dividend matters. But this is too obvious a criterion to which you will pay attention anyway. It would be nice to take into account how it changes from year to year. It’s a good sign if dividends are growing steadily. First, the company is profitable. Secondly, it is the prospect of getting more and more money.
A common mistake of inexperienced investors is to take stocks for a large one-time dividend. You need to understand where the company takes money for payments (if not in debt) and its prospects.
We are talking about the ratio of the annual dividend per share to the price of this share. You can calculate the dividend yield using a simple formula:
“This is how we appreciate the generosity of the company and its willingness to share its profits with shareholders,” explains Ksenia Lapshina. An issuer with a dividend yield of 2-3% is clearly inferior to those who pay 7-8%.
The closing rate of the dividend gap
The transfer of dividends takes place on a certain day, which is known in advance and is determined by the company’s board of directors. The day of payment is the so-called dividend cutoff: on this date, a list of shareholders is formed who will receive the money. The day after the cutoff, stocks usually decline in price by the dividend amount and then continue to move. This event is called the dividend gap.
It is essential that after the cut-off, the stock grows in value. And the faster they grow and reach the level at which they were at the dividend cut-off, the faster we will receive the dividend income due to us.
If the share after the dividend cut-off decreases in price, then the dividends we received only cover losses from the fall in the shares’ value, and we do not receive anything beyond that.
By the way, the investor should be aware of the dividend gap not to buy securities too expensive. According to Nikolai Klenov, a financial analyst at the Raison Asset Management investment company, it is important not to fall into a period when the share price is still relatively high. It is no longer possible to receive dividends in this financial period.
That is, you need to buy securities of dividend companies before the date of fixing the register of shareholders who will receive the money – so that you will get a little. At the same time, it is better to have time before the shares begin to grow, as it became known that there will be dividends.
Financial stability of the enterprise
It is advisable to consider its size and prominence and see if it is included in any stock index. The stronger its financial position, the greater the chances that it will have a profit year after year, some of which will be distributed among shareholders.
First of all, estimate the amount of debt. We understand that debt will not allow paying dividends. First, the profit will be used to pay off the loans. For fans of mathematics, I recommend calculating the ratio of debt to the company’s equity. If the result is greater than one, most likely, there will be no dividends.
It is also worth remembering that dividend stocks tend to rise more slowly than non-dividend stocks. The latter invest all their profits in development – there is nothing left for dividends for shareholders. This allows such businesses to grow rapidly and increase the value of stocks.
If you want to receive passive income in the form of dividends, you should choose reliable, time-tested businesses. If you want to make money on the sale of stocks that have risen in the future, it is better to invest in relatively young issuers with great growth prospects.
What else do you need to know?
Shares are common and preferred. The latter has several advantages. For example, the law allows federal Law of December 26, 1995, No. 208-write in the company’s charter a fixed amount of dividends or a percentage of a share’s par value. This allows their owners to receive money even when there are no payments for ordinary shares. However, if there is nothing like that in the charter, everyone receives dividends in the same amount.
At the same time, the owners of preferred shares do not have the right to vote at the shareholders’ general meeting. An exception is when decisions are made to liquidate or reorganize a company.
According to Dmitry Volkov, director of Teleport LLC, if you are a minority shareholder (your share of shares is significantly less than 1% of the company’s share capital), then the absence of this right can be largely neglected.
Adapted and translated by Wiki Avenue Staff
Sources: Life hacker