When many beginners plan to invest in the stock market, they think of making a profit by following the classic advice to buy low and sell high. However, another way to make money is with dividends. Dividends are payments of cash, property or additional stock, made on a regular basis by a company to its shareholders.
A certain amount of money, decided upon by the board of directors, is paid out of either the company’s earnings or its reserves. Dividends can be quoted in terms of dollar amount paid per share, known as dividends per share (DPS). Another way to describe them is as a percentage of the current market price of the shares, known as dividend yield.
Find the right companies to invest in
The key to making money from dividends is finding the right companies to invest in. There are two important factors to look at. First, a company should offer a high dividend yield on its stocks at the time you invest. To calculate the dividend yield in terms of a percentage, divide the dividend dollar amount by the share price.
This way you can easily compare the yield with other potential investments. Second, the company should have a proven past history of increasing dividends every year. This is one sign of a successful company experiencing a good rate of growth.
Beware of companies offering overly high dividends
It may seem counter intuitive, but there is such a thing as dividends that are too high. Be cautious about investing in a company that promises overly large dividends. Compare its dividends with what is offered on the market as a whole. Several possibilities come to mind. The company may be in financial or legal trouble.
It may be proffering the exceptional dividend as a one-time special offer. The dividend may not be sustainable and will eventually be reduced.
Look at the big picture
When you are considering a stock purchase, the dividend yield is definitely an essential factor. However, you should also take into account the overall health of the company, as evidenced by its balance sheet, as well as its past performance and rate of growth. A good example of this is the coca cola stock 2017 analysis. This will give you a better picture of how profitable your investment is likely to be over the long term.
Another not-to-be overlooked consideration is the dividend tax laws currently in effect. Any stock dividends you may earn will be counted as taxable income in the US. Calculate the after tax income to determine how much money you will make from a particular company’s dividend payouts.