Everyone knows about dividends but do they know which stocks pay out the most or what to do with dividend returns once they’re paid?
Basic Dividend Tips for Novice Investors
- Dividends are basically small cash payouts distributed to shareholders quarterly – by specific companies (see lists below). Usually measured in $/share they’re paid out from a company’s earnings so obviously if a company does well they have more choices in how they spend their profits – either reinvest them internally or distribute them to shareholders as cash dividends.
- Dividends allow shareholders to profit while not impacting their equity stake in a company. Traditionally shareholders profit/lose via trades of a company’s stock through buying/selling that stock. So investors can continue to own the exact same % of a company while bringing in small gains.
- Dividends are usually seen as a strong indicator that a company is doing well in the market as they can more easily just turn their profits inwards with internal reinvestments.
- Investors can choose to take the dividends as a cash distribution – deposited in the cash section of their brokerage account or they can enroll in a DRIP (Dividend Reinvestment Program) which takes the cash and immediately and automatically purchases additional shares of that dividend-paying stock to continue the growth of equity in that company. It’s a convenient way to automate your investment. Taxes are calculated later on when the stock is actually sold.
- Note that dividends are seen as capital gains as they are cash earnings – even if they’re reinvested via DRIP (they’re just deferred until the stock is sold)
- When looking for dividend stocks pay attention to their % Yields not so much their $ yields as favorites like Apple (AAPL) pay good $ amounts but their % Yield is pretty weak (considering the company has cash reserves greater than that of most countries … Apple acts quite stingy on their dividend payouts). This makes sense when you see some stocks with low share prices…you need to take into consideration the % paid per share.
I’m not a sophisticated investor (my opinion as I do not venture into Options Trading….my own artificially created delineator) but have realized that it’s good to have a diversified mix of high-growth (and by definition…high risk) equities as well as some stable “cash cows” which bring in regular, predictable income.
Equities Trading via a Real Estate Analogy
- Think of the volatile tech stocks as properties in hot areas which you want to flip in < 5 years while dividend-paying stocks as solid rental properties which will appreciate in the long term but pay a nice, regular stream of income in the short term. Think SF Bay Area + Anywhere Else …