It has long been known that the easiest way to increase equity is to invest in the stock market, which implies the purchase of various securities that pay dividends. The use of fundamental knowledge to select the securities as well as regular reinvestment of the dividends received allows the investor to shorten the time required to achieve his financial goals. Dividends are the distribution of a part of the company’s profit. Next, we will cover in detail the key aspects of dividend investing. Most often, a company’s management prefers to pay dividends in cash but sometimes it can also distribute shares. Companies that constantly generate significant profits but consider further investment in business development impractical often make a decision to start paying dividends.
Methods of dividend payments and what the investor should know
Dividends can be paid in three ways:
1. Regular dividends are the most common type. Companies issue payouts to shareholders at a certain time, adjusting the amount according to the year’s profit. Often dividends are paid quarterly but they can also be distributed monthly, annually, or biannually.
2. Special dividends refer to a one-time payment. Companies can issue this type of dividend after several highly profitable quarters or in the case of an asset sale if there is no immediate use for the money. Some companies pay special dividends after they have accumulated enough funds, provided there is no need to invest in the business.
3. Floating dividends are paid by companies like those that produce gas, oil, or wood. Such dividends are irregular and are calculated based on the company’s profit for the previous quarter or year.
At the end of the financial year, the shareholders’ meeting may resolve not to pay any dividends for a number of reasons: seasonal decline in sales, a financial crisis, reinvestment, creating financial reserves. In order to receive dividend income, an investor should have a brokerage account and look for information about the shareholders’ meeting where the method of dividend payments will be stated. You can also get the necessary information online. The investor should research not just the current dividend payouts of the company whose securities he is considering for his portfolio but also review the general history of the company’s payouts. This will give him an idea of the company’s stability. Every time the dividends are declared, a so-called dividend gap occurs when the shares fall in price. Traders often take advantage of the dividend gap and purchase shares during this period to make a profit.
Taxation for individuals and entities
Remember that dividends are taxed. They can be credited to your brokerage account before or after taxes in accordance with the applicable tax laws and regulations of your country. Dividends are taxed at the rate of 13% for residents of the Russian Federation and 15% for non-residents.
How can I calculate the dividend amount?
The dividend payment per share can be calculated as the profit remaining after all additional costs have been paid (i. e. the net profit) divided by the number of common shares. Sometimes there is an additional coefficient by which you need to multiply the resulting amount. If you divide the total dividend amount by the share price, you will get the dividend yield as a percentage.
Dividend aristocrats of the American stock market
Dividend aristocrats are companies that pay dividends regularly and their dividend amount is indexed annually. In the USA, there is an S&P 500 Dividend Aristocrats Index. It includes companies that meet certain criteria: their dividend payments are regularly increased, the market capitalization is at least $3 billion, and their trade turnover has been at least $5 million for 3 months. Sixty-four US companies meet these criteria; the examples are McDonald's, Coca-Cola, Colgate-Palmolive, etc. Purchasing securities of companies that are dividend aristocrats allows an investor to build a conservative portfolio and receive a constant flow of cash, provided they are investing long-term.
Summing everything up, we would like to emphasize that the strategy of building a dividend portfolio is one of the most popular strategies in the world and has proven itself over decades. However, bear in mind that if you rely entirely on companies that distribute their profits to shareholders rather than investing in business development, you will get a portfolio that lags far behind the main stock indices as far as growth dynamics. Such an approach should be recognized as conservative and it is more appropriate for an elderly investor at the stage of final distribution of his accumulated funds and not so much for a younger investor at the stage of capital accumulation.