What is a Dividend?
Dividends can be seen as a reward given by publicly-listed companies to their shareholders, and this reward comes from the net profit of these companies. These rewards given to the shareholders can be anything like cash, cash equivalent, shares, etc., and these are mostly paid from the remaining shares of profit after all the essential expenses are done. The rate of this dividend, company’s board of directors decide them also the approval of a majority of shareholders are involved in the decisions.
Types of dividend
There are so many different types of dividend that a company may pay to its shareholders and these are mentioned below:
· Special dividend: this type of dividend is paid on common stock. It is not issued generally but is a particular circumstance like when any company has accumulated substantial profit over a period of time (several years).
· Preferred dividend: such type of dividend, as the name suggests that it is issued to the preferred stock owner and it usually has a fixed amount that is paid quarterly.
· Cash : Most of the companies prefer to cash as a dividend to their shareholders.
· Assets : To make it a level up some companies reward their shareholders with physical assets, investment securities, etc.
· Stocks : This clearly means that the company offers stocks as dividend and they do it by issuing new shares.
· Common stocks: This is the profit which company pay to their common shareholders from its share of accumulated profits.
Dividend stocks can be defined as those companies which are publicly listed and offer regular dividends to their shareholders. Mostly these companies are well-established and have a fair record of allocating earnings to their shareholders.
When you want to choose a profitable dividend stock you need to consider some of these points given below:
1. The company stock you are willing to choose should at least have a 50% dividend payout ratio.
2. The overall dividend yield of the company should be between 3% to 6%.
3. The company should have a fair track record of providing dividends and pay off debts.
Keeping these points in mind and also considering other financial parameters in your head will help you find a company that is profitable and financially stable and strong.
Why invest in dividend stocks?
As already discussed dividend-paying stocks provide a stable and growing income and the investors find them useful to beat inflation. The dividends are usually paid by well-established companies as they do not need to reinvest a large amount of money in their business. Whereas, highly growing companies from the tech and biotech sector don't pay dividends as they require high reinvestments in their companies.
There is no guarantee of dividends on common stocks but as the company grows or raises the dividend, investors can expect its maintenance even during tough times. Dividends are the sign that the company is growing fast and has a high position in the market.
There are many companies paying dividends like Apple, Disney, CVS, etc.
How to evaluate the Dividends?
There are different methods to evaluate the dividends through which an investor can learn about the company's dividend and compare it with others.
1. Dividend per share (DPS)
Dividend per share is the calculation that shows the amount of dividend given by the company for each share of stock in a certain period. This way investors can understand which company is growing its dividend over time.
2. Dividend Yield
The dividend yield is the measure of a company's annual dividend that is divided by the stock price during a certain period. It helps in better comparison of the dividend stocks of different companies as it evens the playing field. There are 2 ways for the stock dividend to rise:
i. The company raising its dividend.
ii. The stock price is down while the dividend is unchanged.
3. Dividend payout
The payout ratio is the easiest way to measure a dividend's safety. If a company paying out 100% or more than its income, it indicates the trouble in its dividend. Earning can fall so low to meet the dividend needs during tough times.