What are Dividends?
To keep it simple, dividends are typically cash that is distributed by corporations to its shareholders. In order to receive a corporation’s dividend, you must invest in their stock. Keep in mind, not all public corporations issue dividends so don’t be surprised when you see one that doesn’t. Dividends are typically issued quarterly, or four times a year. They are issued on a per share basis, meaning that if the corporation issues a dividend of $1 per share and you own 50 shares, you will get $50.
Dividends will typically be stated as a rate or percentage. When I’m looking at a stock, I measure all dividend rates against a 3% benchmark. Anything above 3% is great while anything below is poor to average. You will typically find that value stocks have higher dividend rates while growth stocks have lower ones. Value stocks are typically large, established corporations that are less risky while growth stocks will be a bit riskier.
Should I Invest in Dividend Stocks?
Dividend stocks, as you can guess, are stocks with very high dividend rates. If you look around, you’ll be able to find stocks with dividend rates at 8% or higher. However, as I mentioned earlier, stocks with high dividends tend to be less risky, meaning that they probably won’t decrease much in value, but they won’t increase much either. If you are young, say in your 20s, you DO NOT want a portfolio that is heavily invested in value stocks. You should invest in some for security, but they should not make up your entire portfolio. Why? Because the slow-growing nature of value stocks can hurt your potential earnings in the long-run. While you’re young, you need to be taking risks because if the market does experience a major decline, you still have time to wait for it to recover. The market always recovers.
If you are older and approaching the age of retirement, value stocks are encouraged for you. As you approach retirement, you want a less risky portfolio in case of a major market decline. You may not have time to wait for the market to recover so you don’t want your portfolio to be impacted by the decline too much. Value stocks are encouraged as well as bonds, which are less risky than stocks altogether.
Putting Your Dividends to Work
It is very tempting to pocket your dividend earnings when you receive them. However, this could be detrimental to your future earnings. ALWAYS reinvest your dividend earnings so that you can take advantage of compound interest. Dividends are essentially the interest that you earn from investing in stocks. If you continuously reinvest your dividends back into your stock, your dividends will buy more shares which will help you make more in the long run. CapitalOne Investing, along with many other online brokerage firms, has tools that will allow you to automatically reinvest your dividends free of charge. Automatic reinvestment eliminates the temptation to pocket your earnings.
*By using the CapitalOne Investing link above to open and fund an account, I will receive $20 and you can receive anywhere from $50-$600 depending on how much money you deposit initially
In conclusion, dividends are basically the interest you earn from owning stocks. Value stocks typically have higher dividend rates while growth stocks usually have lower rates. While you’re young, TAKE RISKS, and become more and more conservative as you approach retirement. Finally, always reinvest your dividends to take advantage of compound interest. Thanks for reading and as always, leave your questions and feedback!