Dividend Investing

A stock that pays dividends is a sign of a healthy company. Dividend investing is an investment strategy that seeks to take advantage of the strength of these companies. Here we will discuss what dividend investing is and highlight important dates that dividend investors should be aware of. Lastly, we will run down the benefits of dividend investing.

What is Dividend Investing?

Dividend Investing is an investment strategy thats seeks to capitalize on the incetives that public companies payout to shareholders on a regular basis. Coorporations reward investors for holding shares in that company by using some of their profits and payout out a stock dividend to the share owners. Dividend investing is a very common investment strategy to hedge against inflation as it provides the shareholder with a consistent stream of earnings based on the shareholders equity.

Dividend investing is a style of investing that seeks to take advantage of the dividends that a company pays to its shareholders. This is similar to the profits any small business owner might gain from his share in a small business. It is profit that is distributed to the owners of the company.

The dividend is set by a company's Board of Directors. Some companies have no dividend, typically either because they are poorly performing and can't afford to pay a dividend, or the company wants to reinvest as much of their profit back into the company.

Important Dividend Dates

There are three dates that are vital to dividend investing. These are the declaration date, the date of record and the payment date.

In order for a company to pay a dividend, it must be approved by the company's Board of Directors. This has to happen each time a dividend is paid. When this happens, the dividend is said to be declared. The declaration date is the day that the Board of Directors announces the dividend.

The ex-dividend date, also known as the date of record, is the day that the stockholders are recorded. Each stockholder of record on that day is entitled to the dividend payment.

The payment date is the day when the dividend will finally be paid. Most companies that pay a dividend do so on a quarterly basis, although some pay a monthly dividend. The amount of money you receive as a dividend will depend upon the dividend set by the company.

The percentage of a company's net income that is paid out as a dividend is the dividend payout ratio. The percentage of the net income that a company keeps is called the retention ratio. The annual dividend divided by the stock price gives you the dividend yield.

Advantages of Dividend Investing

Dividend investing has certain benefits. Here are a few of them.

Earn Passive Income

Dividends provide a means to earn income with no further effort than buying stock. Companies that consistently and reliably pay dividends are more stable than average companies. Diversifying your portfolio among different sectors not only limits your risk but can also diversify your payment dates across multiple stocks, giving you a regular stream of income. Dividends are often taxed at a lower rate than normal income as well.

Reinvesting Dividends Leads to Growth Compounding

By reinvesting your dividends into buying more stock, by entering a DRIP plan (Dividend Re-Investment Plan), you can use the dividends to increase the number of shares you own. This increases your dividend for the future. Continuing to reinvest your dividends in high dividend stocks will continue to compound your returns, as you are not only earning dividend income from your initial investment, but also from each additional dividend that you earn and reinvest.

Hedge Against Inflation

Stock is a hedge against inflation. While holding your assets in cash or a savings account, your principal will lose value. With stocks, however, the value of your stock will go up in the face of inflation as it will be worth more in terms of the falling dollar.

Final Thoughts

Dividend investing takes advantage of companies with the strength to pay a regular dividend to its owners. Three dates to keep in mind when investing in a stock for its dividend are the declaration date, the ex-dividend date and the payout date. There are many benefits that come with dividend investing, including the ability to earn passive income, the potential to easily compound your income growth through dividend reinvestment and the hedge against inflation that comes with holding stocks long-term.