All You Need To Know About Dividend Stocks
Introduction
Stock market investment is one of the most popular ways of making money. As you dive into the world of stocks, you will discover several types. One such is dividend stocks. What are dividend stocks, how do they work, and how can you invest in them? Let’s unravel.
What are dividend stocks?
The stocks of companies that make regular payouts from their profits as a reward for your investment are known as dividend stocks. These rewards can be in the form of cash or reinvestment in additional stocks. The dividend payout you receive is decided based on the number of shares you own and the dividend yield.
The dividend yield refers to the dividend per share, represented as a percentage of a company’s share price. The more shares you own and the higher the dividend yield, the higher you earn. Usually, large and established companies making consistent profits are the best dividend payers. Industry sectors with a consistent record of dividend payments include oil and gas, healthcare, utilities, banks, etc.
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How do dividend stocks work?
Companies may choose to pay dividends monthly, quarterly, or annually. The board of directors of a company decides the rate of dividends. So, dividend payouts can vary from company to company.
Owning or purchasing a company’s stock before the ex-dividend date makes you eligible to receive the dividend payout. An ex-dividend date is when the dividend eligibility expires. It is when a company stock begins trading without the value of the profits factored into its share price. You need to wait for the next payout if the stock is purchased after the ex-dividend date.
You can receive the dividend in cash, which is the most common method. You can either withdraw this money or use it to expand your portfolio. You can also receive additional shares of the stock you hold. A few companies offer Dividend Reinvestment Programs known as DRIPs. These allow you to earn dividends and reinvest them back into the company.
How can you invest in dividend stocks?
Now that you know about dividend stocks and how they work, here’s how you can invest in them:
Step 1: Open a Demat and a trading account
Investment in dividend stocks works like investment in any other stock. Start by opening a Demat and a trading account with a reliable stockbroking firm.
Step 2: Conduct thorough research
Next comes research. Make sure you research companies issuing dividend stocks. You can do so based on their dividend yield or growth. Higher yield translates into more earnings. However, companies with higher dividend yields may have weak growth prospects. On the other side, dividend growth indicates how often a company increases its dividends. These stocks may have a lower yield, but the consistent increase in payout in the long run makes them attractive.
Step 3: Select stocks
You can explore companies in different sectors like healthcare, technology, oil and gas, etc. Pick the ones with healthy finances and a record of paying dividends consistently. Also, assess your risk appetite and investment goals before choosing dividend-paying stocks.
Step 4: Track your investments
Once you decide which stocks to purchase, keep an eye on the performance and financial health of companies in your portfolio. Companies that pay dividends today may not do so tomorrow. They may reduce or eliminate their dividends during a struggle. Hence, choosing high-quality dividend stocks of companies with strong performance and growth prospects is vital. You can withdraw or reinvest the dividend according to your needs and goals.
Wrapping Up
Dividend payouts help companies attract more investors and maintain their trust. This may increase a stock’s demand and its price. As an investor, you can ensure a steady source of income by investing in dividend stocks. You can withdraw or reinvest the payouts to maximise earnings from your investments.
However, like any other investment avenue, dividend stocks too involve risks. You must thoroughly research a company’s financial soundness and prospects before investing. Diversifying your portfolio and tracking your investments regularly also helps avoid losses.
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