January 27, 2023
The name dividend sounds dispensable or some how diminutive, not worth the bother. And yet, oil profiteer and American business magnate, John D. Rockefeller quipped once: “Do you know that the only thing that gives me pleasure? It's to see my dividends coming in.” Rockefeller’s wealth is renowned, profiting enormously from Standard Oil in the 20th century.
Dividends are payments made by corporations to their stockholders from earnings. It is a straightforward way that a company can communicate with their retail shareholders about its well being and health by sending a dividend check. And when payments are made consistently and increase, it underscores the idea that the company is robust and stable. Companies that pay dividends are more likely to be deep rooted, so dividend stocks can contribute to the stability of your portfolio. In fact, that is why a lot of investment advisors classify them as a low risk investment opportunity. Not all companies produce dividends. If you are interested in dividends, you will need to seek out companies that offer them.
Dividends can provide a consistent income source and that is why it is also called dividend investing. An additional incentive for investing in dividends other than consistency is that qualified dividends paid are taxed at a lower rate than the standard income tax rate. During periods of recession throughout history, dividend stocks have shown growth. And for investors who don’t enjoy doing the research to individually pick dividend stocks to invest in might want to choose dividend mutual funds and dividend exchange traded funds (ETFs). Available to a range of budgets, they include many dividend stocks within one investment and disperse dividends to investors from these holdings.
Examples of companies that pay dividends include ExxonMobil (Tii:XOM), Target (Tii:TGT), Apple (Tii:AAPL), CVS (Tii:CVS), American Electric Power (Tii:AEP) and Principal Financial Group (Tii:PFG). An elite group of S&P 500 stock companies appropriately named the “dividend aristocrats” have increased their dividend every year for at least 25 years. In contrast, high-growth companies, like tech or biotech companies, rarely pay dividends because they reinvest profits into expanding growth.
A typical sequence for dividend investing returns might look like this: the company earns profits, the board of directors approve a plan to share these profits, (typically in the form of a dividend), dividends disbursement could be quarterly, monthly or semiannually, the company publishes the interval in which it will be paid and the amount of the dividend — and finally — the company pays its investors. It is important to note that investors must have purchased the stock at least two days before the date of a dividend payment, otherwise known as the “date of record” to receive that payment.
Before making a decision on dividend investing, individual shareholders will want to know what type of dividends a company is issuing: cash, stock or dividend reinvestment programs. Predictably, all types of dividends are taxable. And dividends paid by U.S.-based or U.S.-traded companies to investors who have owned the stock for at least 60 days are called qualified dividends, and are subject to capital gains rates. Investment advisors recommend that a way to measure a dividend’s safety is to check its payout ratio, or the portion of its net income that goes toward dividend payments. Typically a company that has a payout rate 80% or lower is acceptable, anything larger than 80% would be a red flag about the company’s long term stability. Payout ratios will be listed on financial or online broker websites. As with any good habit, dividend investing wealth can grow incrementally.
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