When a public company makes a profit, they either reuse that profit and invest it for the betterment of the country, pay their debts, buy their shares, or distribute a part of that profit to investors. The case where the profit is distributed among investors is known as a dividend. The strategy of buying stocks that pay dividends as a regular income is known as dividend investing. When the dividend is paid through cash, it’s known as a cash dividend, which is mostly the case. But sometimes, this dividend is paid to the investors in the form of stocks, which is known as stock dividends. A company can have a dividend reinvesting plan or DRIP, through which, the investors can choose to reinvest the dividend to buy more shares. This is very lucrative if the dividend is small or the investor doesn’t own a bunch of stocks.
Investors are highly inclined towards the dividend yield for determining which companies to invest in. The dividend yield is directly proportional to the current share price. There is a misconception that paying dividends impact the value of the company’s share price. But, this information is absolutely false in terms of dividend investing. Usually, growing companies invest their profit to facilitate growth. This is a useful strategy. Well established companies usually pay regular dividends. Because this is done to gain the trust of loyal investors.
How It Works
Investors can reinvest dividends by buying more stocks as mentioned earlier. This would result in a higher yield of dividend as long as the buying choices are appropriate.
Is Dividend Investing Safe
Experienced investors look for dividend safety first. Dividend investing depends on the possibility of a company to pay the same or higher dividends continuously. There is transparency in companies about what percentage of dividend is provided to the customers. But, you can also analyze the safety yourself by comparing earnings to dividend payments.
A very useful tip is that if companies pay a dividend of less than 60% or less of their total profit to the investors, they can be easily counted for the predictability. Dividend investing should also be done after some dividend safety analysis. If the company is fairly new, constant dividend payments is risky even at a low dividend payout ratio. The payout ratio can be higher if the incoming money is stable. Try to look for companies which have a stable profit.
Strategies For Investing
You could go two ways in terms of dividend investing. One is a high dividend yield strategy and another one is a high dividend growth rate approach. The high dividend growth rate approach is buying shares in companies that pay a lower dividend. But, the growth of the company is pretty good. This strategy pays off if you’re willing to wait 5 or 10 years to make an absolute substantial income. The high dividend yield approach considers companies that are slowly growing. These companies have good cash flow. In this way, the dividend payments are regular and a decent amount. Most importantly, this process initiates immediate income.