Just read Kool Kanya’s blog on when to start investing and earning more money? And now you’re exploring dividend investing? If yes, then you have definitely come to the right place. Sit back, relax, and read on as we help you add those extra is to your bank account with dividend investing.
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What is dividend investing and why you should care
As rewards for holding their stocks, many businesses give shareholders a part of their profits in the form of dividends. Stock holders are motivated by this and are reassured that the company is confident about its future.
In order to generate a sizable stream of passive income, dividend investors typically only invest in businesses that pay dividends. With dividend investing, a shareholder may benefit from both dividend income and share price growth.
Every quarter, companies pay dividends after the board has approved them. An investor's goal is to determine whether a company's dividend is appealing by looking at its dividend yield. Dividing a stock's current price by its dividend payout yield is how you can calculate the dividend yield of a company.
A common myth that entraps beginners is: "Dividend investing is unsafe. But don't worry because dividend investing can certainly be worth your time and money when done the right way. One of the top reasons dividend investing is a route you must consider is because it acts as a consistent and reliable source of passive income. And in today's world of firings, layoffs, and toxic work culture, don't you want to be able to have a secondary source of income to rely on? As an investor, the only thing you need to do is buy the stock and hold on to it long enough to receive dividends. Even if the share prices are going down and the market is not in great shape, dividend investors still receive dividends. This means that your returns on dividend stocks are guaranteed.
The beginner's guide to dividend investing
Now that you know that dividend investing can help you earn a passive income, let’s learn some tips and tricks to build a solid dividend investing strategy:
Warning: None of these tips are professional advice and the reader is suggested to conduct their own research before engaging with the investment market.
- Remember, quality over quantity
The dividend yield is one of the most important considerations for investors when investing in dividend stocks. The higher the yield, the better the return is usually the mantra, but these numbers can be deceiving. In this case, dividends can quickly dry up if the stock’s current payout level is unsustainable over time, leaving you scrambling for a way out of a sticky situation.
You need to focus on selecting an investment that is sustainable over a long time and offers stability. You might need to sacrifice a short-term gain for a more consistent long-term gain. This essentially means that you might not receive a high yield immediately but if you purchase and hold on to a stable and sustainable stock long enough, you can get a good yield in the long run. There is a possibility that lower-risk dividend stocks will generate less income, but that income is more likely to be consistent over the long term. So, invest in dividend stocks calculatedly to get good returns.
2. Invest in companies that have earned a “dividend aristocrat” status
In very simple terms, the companies that are considered dividend aristocrats are those companies that are consistent in paying dividends to their shareholders as well as are known to annually increase the size of their payout. These companies are established and stable, and have increased their payout in the last 25 years. This is the kind of sustainable company that’s mentioned above. Their income is steady, and it's likely to remain the same in the future as well.
So, ensure that you invest in these types of companies as they offer dividend growth which is crucial to a dividend investment.
3. Know when to cut your losses
When it comes to dividend stocks, it is important to know when to cut your losses. This essentially means you need to know when to hold, when to let go and when to hold on. Any investor can make this mistake when purchasing stocks that seem attractive. The smartness is cutting your losses before it's too late by recognising when to sit tight and when to let go of a sinking stock.
So, the key here is to identify the fine line between waiting for the investment to pay off and holding on too long to a sinking ship.
4. Pay attention to the dividend payout ratio
The dividend payout ratio is the ratio of the company's net income to the total amount of dividends paid to shareholders. It is the portion of earnings that is distributed as dividends to shareholders. It is of utmost importance to be mindful of this because it is a great way to check how safe your investment is. This ratio tells you both the amount of income the company can retain as well as the amount being paid out to its shareholders.
When you spot a company that offers a high-yield dividend stock, but also distributes a substantial portion of the company's earnings to investors, you need to tread carefully. Because in such cases the company's income stream is reduced and the dividends you receive may be at risk.
Use this blog as your sign to invest in dividend stocks and add extra 0s to your bank account today, because time and money wait for no one.
And don’t forget about Kool Kanya’s course; Finance Pass: Personal finance made easy, your key to unlocking all the potential that investing has in store for you.
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