Dividends – Great Way to Earn Some Extra Gains

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 …

References

Nasdaq’s Highest Yield Dividend Stocks

Warren Buffet’s Top 4 Dividend Stocks: AAPL, KO, IBM, GS

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