A lot of people think that dividend stocks are a thing of the past, that they only benefit retired investors living off their dividends. However, nothing could be further from the truth.
Dividend stocks offer many benefits to investors, especially those who are looking to build long-term wealth. In this video, we’ll go over what dividend stocks are, the benefits they offer, and how to get started investing in them.
What Are Dividend Stocks?
Dividend stocks are simply stocks that pay dividends. A dividend is a portion of a company’s profits that is paid out to shareholders. For example, let’s say Company XYZ makes $100 million in profits each year. Company XYZ may decide to pay out $10 million of those profits to its shareholders in the form of dividends.
Why Do Companys Pay Dividends?
A High dividend payout is important for Investors because dividends provide certainty about the company’s financial well-being. Typically, companies that have consistently paid dividends are some of the most stable companies over the past several decades.
Companies often increase the payout of their dividend if they are doing really well in order to attract investors. As more people invest the share price of their stock will increase which in turn raises the value of the company.
Paying dividends sends a clear, powerful message about a company’s future prospects and performance, and its willingness and ability to pay steady dividends over time provides a solid demonstration of financial strength.
Why Invest In Dividend Stocks?
There are several benefits to investing in dividend stocks, including:
1. Regular Income: Dividend stocks offer investors a regular income stream. This can be especially helpful for retirees who need to supplement their Social Security or pension income.
2. Long-Term Wealth Building: Dividend stocks also offer the potential for long-term wealth building. This is because dividend stocks tend to increase in value over time, providing investors with capital gains as well as regular income.
3. Diversification: Dividend stocks can help diversify your portfolio. This is because they tend to perform differently than other types of investments, such as bonds and growth stocks.
4. Stability: Dividend stocks tend to be less volatile than other types of investments, providing a measure of stability for your portfolio.
How Do You Make Money In The Stock Market?
There are a couple of ways that you can make money with Dividend Stocks.
Price Appreciation:
When you buy a stock, you hope that the price will go up so you can sell it at a higher price and make a profit. This is called “price appreciation.” When you sell a stock for more than you paid for it you have what is called “Capital Gains”.
Dividends:
Some stocks also pay dividends. A dividend is a portion of a company’s profits that is paid out to shareholders. For example, let’s say Company XYZ makes $100 million in profits each year. Company XYZ may decide to pay out $10 million of those profits to its shareholders in the form of dividends.
What Are The Different Types of Dividend Stocks?
Income Stocks:
Income stocks are stocks that pay regular dividends. For example, a company like AT&T (T) pays dividends every quarter. Dividend stocks tend to be less volatile than other types of investments, providing a measure of stability for your portfolio.
Growth Stocks:
Growth stocks are stocks that are expected to grow at a faster rate than the market average. For example, a company like Amazon (AMZN) is a growth stock because it is expected to grow at a faster rate than the overall market.
Value Stocks:
Value stocks are stocks that are trading for less than their intrinsic value.
How Much and How Often Do Dividend Stocks Pay?
Dividend stocks typically pay dividends once per quarter. However, some companies pay dividends more or less often. For example, a company like AT&T (T) pays dividends every quarter.
The amount of the dividend payment varies from stock to stock. For example, a company like AT&T (T) may pay a dividend of $0.50 per share, while a company like Apple (AAPL) may pay a dividend of $2.50 per share. Another way to look at the dividend payout is as a percentage. Many stocks pay a dividend in the range of .5%-as high as about 5% of the stock price.
When Is The Best Time To Buy Dividend Stocks?
The best time to buy dividend stocks is when they are trading at a discount to their intrinsic value. For example, a company XYZ may be trading at $30 per share, but its intrinsic value may be $40 per share. This means that XYZ is trading at a 25% discount to its intrinsic value.
As a general rule, you should look for dividend stocks that are trading at a discount of 20% or more.
Another good time to invest in Dividend Stocks is when interest rates are on the rise. This is because dividend stocks tend to outperform other investments when interest rates are rising. They outperform because, as rates rise, the value of bonds falls and investors look for other investments that will provide them with income.
When Is A Dividend Safe?
A dividend is safe if the company has a strong financial position and is expected to continue paying dividends in the future. For example, a company like AT&T (T) may have a strong financial position and is expected to continue paying dividends in the future.
You can check a company’s financial position by looking at its balance sheet. A company’s balance sheet will show you how much debt it has and how much cash it has on hand.
As a dividend investor, you want to keep track of the coverage ratio of your dividends.
There are a number of different ways to calculate this, but one way is as follows:
Dividend Coverage Ratio = EPS / DPS
You want to take the earnings per share paid out over the last four quarters and divide it by the dividends per share paid out in the same timeframe. You will end up with a number that represents the dividend coverage ratio.
If that number is below 1, it means that this company is paying out more in dividends than they are earning. This is a huge red flag as a dividend cut is almost guaranteed to occur.
If the dividend coverage ratio is between 1 and 1.5, you should be careful. While a cut might not be immediate or necessary, this company has small overage of the dividend.
Ideally, I look for a coverage ratio of 1.5 to 2.
This indicates that the company is retaining enough earnings to maintain financial health. On the other hand, if the dividend coverage ratio is well above 2 this can indicate that the company is retaining earnings and holding them back from investors.
You can also check a company’s dividend history to see if it has a history of increasing its dividend. A company that has a history of increasing its dividend is more likely to continue doing so in the future.
What Are Some Of The Best Dividend Stocks?
Some of the best dividend stocks include AT&T (T), Apple (AAPL), ExxonMobil (XOM), Johnson & Johnson (JNJ), and Procter & Gamble (PG).
These companies have strong financial positions and are expected to continue paying dividends in the future. They also have a history of increasing their dividends.
What Are The Risks Of Investing In Dividend Stocks?
There are a few risks to be aware of when investing in dividend stocks.
The first risk is that the company may not have the financial strength to continue paying its dividend. This could happen if the company runs into financial difficulties or if the industry it is in declines.
The second risk is that the company may cut its dividend. This could happen if the company’s financial position deteriorates or if the company needs to conserve cash.
The third risk is that the dividend may not grow. This could happen if the company’s profits decline or if the company does not increase its dividend in line with inflation.
How Do You Get Started Investing In Dividend Stocks?
If you’re interested in investing in dividend stocks, there are a few things you need to do:
1. Open a brokerage account: The first thing you need to do is open a brokerage account. This is an account that allows you to buy and sell stocks.
2. Do your research: Once you have a brokerage account, it’s time to start doing your research. You’ll want to look for companies that have a history of paying dividends and that are likely to continue doing so in the future.
3. Consider your investment goals: You’ll also want to consider your investment goals before you start buying dividend stocks. Are you looking for income or long-term wealth building? This will help you choose the right stocks.
4. Start investing: Once you’ve done your research and considered your investment goals, it’s time to start investing. Beginner investors may want to start with just a few shares of stock to get started.
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Conclusion
This is a basic guide for beginners who are interested in dividend stocks. Dividend stocks can be a great way to earn income and build wealth. They are typically less volatile than other stocks and can provide a steady stream of income.
Always do your research and consider your investment goals before you begin buying dividend stocks. For more stock and financial information, please check out our other resources at OptionsFinanceProfits.com.
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