Maximizing your dividend earnings can be a central component of a winning investment portfolio. Understanding dividends and their respective yields is important for every investor.
Learn How Dividends Work
Dividends are payouts that companies make to their shareholders, providing them with a portion of their profits. Companies tend to make these payments in regular installments, usually on a quarterly basis.
A dividend yield is the ratio of the company’s annual yield–meaning the total amount it pays out throughout the year–divided by its share price. In other words, it represents the annual return on your investment.
As an example, if you own a stock that costs $100 to purchase and pays a quarterly dividend of $1 your annual dividend earnings will be $4. This will make your dividend yield equal to 4%, or $4 dividend divided by the $100 share price.
This should not be thought of as a static number, as the share price can fluctuate and dividends are never guaranteed. For instance, if the price of the stock rises to $120 and the dividend payouts remain unchanged, the dividend yield will drop to 3.3% even though the value of the stock has increased. For this reason, drops in dividend yield should not be considered as a stand-alone metric but rather as part of your overall assessment.
Zoom in on the Right Dividend Stocks
Finding dividends that offer value depends on a number of factors, first and foremost investing in dividend-paying companies. Not all companies offer their shareholders dividends, and even some profitable ones prefer to plow their earnings back into their businesses.
As a first step, make sure to learn which companies pay regular dividends. There are numerous resources publicly available, including the TipRanks’ Best Dividend Stock page, which lists of some of the top dividend-paying stocks on the market.
Once you have identified companies that pay regular dividends, one proven strategy is to seek out dividend aristocrats, which are a subgroup of dividend-paying companies who have consistently paid out dividends for 25 years, while increasing the size of the payments along the way.
It is important to remember that past performance is no guarantee for future payouts. That being said, companies who have a history of paying dividends are likely to continue doing so in the future.
Check the Underlying Fundamentals
Dividends are a reflection of the health of the company paying them, and understanding the business itself should not be overlooked.
Projected earnings can give you a sense of the direction the company is headed in, and whether dividend payments are likely to continue. If it looks like smooth sailing ahead, the odds are good that the company will continue to share its wealth with their owners.
A good rule is to make sure that you understand company operations. Well-run companies that are steadily turning a profit, and even increasing their revenues, give strong indications for future dividend earnings.
On the flip side, companies whose prospects you are bearish about should be avoided. Dividends are not paid in a vacuum, and you should only look to purchase stocks in companies that you believe are headed in the right direction.
DRIP Your Way to Wealth
Dividend-paying stocks can provide a regular source of revenue for investors, and what you do with this income is also important. Some companies offer an option to re-invest dividends by purchasing more stock through a dividend reinvestment plan (also known as DRIP).
Via DRIP, investors can purchase more shares in the company in lieu of a cash payment. There are numerous benefits for doing so, the primary one being that investors will automatically re-invest their capital and enjoy the advantages of compound interest. Compound interest relies upon the principle that the earnings from your investments will begin to bring in their own monies, therefore allowing you to more rapidly increase your wealth.
DRIP is a type of dollar-cost averaging, whereby investors devote the same amount of money into the same investment at regular intervals. Doing so addresses the risk of market volatility by spreading out the price points at which you are acquiring assets.
Conclusion: Cash in on Dividends
While holding onto the stock as its share price increases over time will eventually bring you value when you sell your shares, dividend payments provide a regular source of income. There are some tried and true practices to follow to maximize your dividend payments.
Always, when looking to invest in dividends, it is important to conduct research into which companies have historically had strong dividend yields. However, it is not enough just to look at previous quarters, and one should always make sure that the company’s fundamentals, earnings, and future performance look promising. TipRanks’ dividend calculator can help you understand the potential payoffs of investing in particular dividends, which can assist you throughout your dividend journey.
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