Currently, the stock market is becoming more popular by the day. This is great news! It means that people are starting to take charge of their financial literacy, and working towards financial independence. A common misconception is that the only way to invest is through stocks. the idea that is pushed mainstream is to buy low, and sell high. Truth be told, this is a great way to make some extra cash and grow your wealth over time. But there are more ways to reap the benefits of your investments in real time, one of which is through the dividend.
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What is Dividend Investing?
Dividend investing is buying stocks, bonds, ETF’s, etc and collecting a periodic payment from these investments. It allows you to reap real time benefits by cashing in these payments, while your portfolio still has the ability to appreciate in value. The duality of capital appreciation and secondary cash flow is what draws a lot of people to go the dividend route. Dividend investing allows you to have a portfolio that grows in value, while you take payments to cover your bills.
Dividend investing often gets a bad rap in the investment community because it is seen as the more conservative investment vehicle. This can often be seen as boring, or slow going. However, capital appreciation is not the end all be all of investing. In fact, capital appreciation is kind of limiting in that you really cannot enjoy the cashflow unless you sell part of, or all of your position in a company. Our buddies over at The Motley Fool go into great detail on the different types of investing, and the pros and cons. They also constantly offer discounts up to 50% on their stock advisor that is often utilized to challenge market averages
For many, dividend investing is a secure, and lucrative way to generate a hefty passive income. It may not be the most “exciting” way to invest, and it wont make you rich overnight. However, with the right strategy, and a lot of patience, you have the potential to generate a very formidable supplementary income, and even retire early!
How Do Dividends Work?
The way dividend investing works is by averaging in on a stock to get the best deal while collecting payments. Dividend payments can range in frequency. The most common frequency is quarterly, or a payment every 3 months. However, there are also bi annual, annual, special, and even monthly dividends. This provides the vehicle to collect payments. for example:
– You decide to buy 50 shares of Archer Daniels Midland Co at the current price of $40.8.
– The company currently offers a dividend of $0.35 per share
– Now you have 50 shares of ADM, and you will be receiving a payment of $0.35 x 50 shares every quarter.
– This comes out to $17.50 every 3 months just for holding 50 shares of a stock.
Do you see now how this can become lucrative very quickly?
The Dividend Yield
You have to be very diligent when investing for dividends. a dividend payment differs by stock ticker symbol, and can range from $0.01 to around $2.00 per share and beyond, depending on yield. according to Dictionary.com the dividend yield is a dividend expressed as a percentage of the current share price of a given stock. For example: Archer Daniels Midland Co currently has a share price of $67.66. They offer a dividend payment of $0.37 per share, every quarter. This would give them a yield of 2.19%.
Here is the math for those who are curious:
0.37(div)/67.66(price) = 0.005468.
0.005468 x 100 = 0.5468
0.5468 x 4(quarterly dividend) = 2.19% yearly dividend yield.
it is also assumed within the investment world that the higher the yield, the less stable the dividend. To a lot of investors, if a company is willing to pay a higher percent yield, it shows that they are basically incentivizing shareholders to buy into their stock. There have been many times where a stock has boasted a high yield, and then cut the dividend later on to pay off debt, or perform buy-backs during a down market.
Why are Dividends Important?
After everything that we have gone over, I’m sure some of you are wondering: Why is investing for dividends important? How is it actually a formidable alternative to capital appreciation? There are multiple reasons why dividends give us an advantage when investing for our future. The first one being that it allows us to collect up to a monthly income just for holding shares of a company.
Another way that dividends offer an advantage over capital appreciation is through the power of compound interest. Investopedia.com describes compound interest as interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan.
This basically means, you earn interest on your principal balance AND your earned interest. You are essentially earning interest on your interest, and is how people are reaching millionaire status by retirement age without doing any work! The snowball effect that your money will have in a few years work as incentive for holding the shares long term.
Lastly, dividends allow us to have peace of mind during a down market. While capital appreciation investors may worry about the value of their portfolios taking a plunge, dividend investors are STILL receiving payments while their principle investment is recovering from a down market. Why wouldn’t you want to be paid to hold onto a stock?
Conclusion
So there you have it guys. We just went through:
– What a dividend is.
– How dividends work.
– Why dividends are important.
So now it is your turn. What is your favorite way to invest? and what is your favorite dividend stock? For more investment fun, please visit our post on How Roth IRA’s are making people into millionaires. Thanks for reading, and I will see you all in the next blog post!
