Dividend Investing

The idea of dividend investing is considered one of the best ways for investors to collect steady and consistent returns. There are several people who invest in these dividend stocks to take advantage of that dependability before utilizing some of those incoming funds to invest back into more shares of stocks. It is kind of like playing with some house money after winning a few rounds of blackjack at the casino. The main difference is that if you make smart investing decisions, you'll have a better chance at yielding some gains than beating the dealer. Because there are many dividend-paying stocks that represent different organizations that are considered a safer bet for investments. The prices might increase over time, which leads to bigger gains for shareholders. Additionally, those companies will raise dividend payments over time, such as providing a 3 % dividend after one year at about 2.5 %. At the same time, those are never set in stone.
But, a company that builds a profile and gives its shareholders dependable, increasing dividends will do everything possible to continue pleasing their investors. There are companies that will pay consistently increasing dividends; they are usually considered financially healthy, generating a dependable return on investment on the different dividends. Stable companies usually feature any falling stock prices to make it less alarming for the shareholders in the general market. Because of this, they can be considered less of a risk than the companies that do not pay those dividends and, in turn, see more sharp ups and downs in the price. With a lower risk for the investors of these dividend stocks, they can be a more attractive option for a variety of investors, such as the young bucks who are hoping to get more income over the long haul and for those who are looking to build up their retirement fund. Even those already in retirement use the money from dividend investing in providing a regular income while they are not working. Another reason that these dividend stocks have built confidence among dividend investors is the correlation between the share prices and the yield of gains from the dividends. When one rises, the other follows. There is also the consideration for the power of compounding your investments, which is taking the generated earnings and putting them back into the stocks that will continue to build more and more.
In other words, the money you have generated from your earnings will generate additional earnings, and the generated earnings will continue to multiply as the investor continues to reinvest in the long run. This process can hypothetically turn one penny into a very large sum of money after about a month. If you take that one penny and continue to double your account every day for 30 days, you could see your money grow from a few cents to a few dollars. Ten dollars becomes $20, which becomes $40, then $80, $160, $320, $640, up to thousands and, eventually, millions. Sure, there are a lot of things that have to happen, and it requires a little luck. But in theory, it can happen, even if it is a bit unrealistic. This is not to say that any investor can expect to see their money grow when they begin to utilize dividend investing. But it shows that money can, and likely will, grow in a process that Albert Einstein once called the eighth wonder of the world. Many who enter the world of dividend investing will see the eventual rise of their rate of return as they continue to reinvest the money that comes in their returns on investment. Let us say that you have 100 shares of a stock that sells at $50 per share. This is an investment of about $5,000. In that first year, the company offers a 2.5 %dividend that provides an income of $125. If the investor continues to see dividend growths of 5 % each year, that $5,000 initial investment will be valued at more than $11,200 after about 20 years. This is with the assumption that there will be no change in the stock price, and there is the reinvestment mentioned earlier.
Now let us have that same company pay a quarterly dividend rather than one that pays annually. That $5,000 investment will grow to a little more than $11,650 in two decades for a gain of about 133 %. Because of the process of compounding, a $50,000 investment can become a $116,500 sum after that same period of time during which there are reinvestments into the dividend folder.
The Pros of Dividend Investing
Regenerating Cash Flow
There are moments when a company will declare that they offer a special dividend, which on paper, does not necessarily bring a benefit to the investor. In this case, a company usually gives the money back since they feel there is no use for it, thinking you could probably get a better return in another way. That could be a sign that the company does not have any new products, or they are in the middle of a saturated marketplace with a minimal chance for growth. If a company is prepared to grow, they retain the earnings so that they can be reinvested back into the company's expected expansion, but companies with minimal growth potential usually give the money back to their shareholders.
Dividends are best when a company has products and services that can help generate a cash flow that comes in a dependable fashion. Investors want to see the company they have shares in replenishing a dollar cut to its stock price for every dollar paid in dividends. The goal is to bring as much surplus money from one fiscal quarter to the next. This regenerative flow of money usually comes from companies that have minor debt and a little more experience as a business.
The Benefit of Trade-Off
Every investor should keep the potential trade-off in mind whenever they decide to invest in dividend stocks.
While you are receiving that consistent and steady flow of income, there is generally a lost opportunity in the growth of the stock, and a market that becomes hot can easily do better than the percentage gains an investor receives from their dividend investments. But even if the stock market has that sort of turnaround—a change of pace from what it has been in the past decade—an allocation that brings gains of 20 % or more, which can come with dividend stocks, can go a long way in increasing the performance of an investor's stock portfolio. By doing so, it also gives an investor a little bit of extra money that can be reinvested at times when there is a pullback from the market. This allows the investor a chance to gather up any other stocks that have grown at a discounted cost to purchase.
Security With Dividends
Despite the chances that a dividend can be trimmed or suspended, investors have to be certain that the company from which they have bought stocks will continue to pay them for the long-term. But the good news is that there is a long list of safe, dependable options to choose from. One of the easiest ways to start is to look into mature large caps like the choices found within Russell 1000 Index. Those 1,000 companies usually offer yields that range from 1 to 5 %, sometimes even more. There is even stronger dividend security found among what are affectionately called "Dividend Aristocrats." These are companies that have been consistent in how they pay their shareholders and have increased regularly for at least 100 fiscal quarters, which equals about 25 years.
That type of longevity is what attracts the investors the most and makes dividend investing a very popular choice.

recent performance may show a stock price drop, and that the most recent dividend payment was made between a few weeks and a month ago. This combination means that the yield percentage reached a high that it probably will not be sustainable for the long- term road. The drop in the stock price is usually a sign that the next dividend payment is going to see a big decrease as well, and that is if it is not suspended, like many companies in this predicament have done in a way to give itself time to sort things out. It is something to look out for when looking at the market.
Dividend Investing vs. Index Investing
While dividend investing focuses on the ability to maximize cash that is then distributed among the shareholders of each stock, index investing is a passive approach that hopes to generate the same return rate that correlates with the market index.
In other words, it hopes to replicate the performance of specific equity or fixed-income index through things like index funds or exchange-traded funds. Not every larger company pays its shareholders in dividends as growth investors are usually found on the other end of the spectrum from those who focus on dividends. A company that pays a dividend is usually one that already has a track record of having yearly profits and has a belief that the real money is in identifying the stocks that have the best potential to grow fast and provide advantages in the open market, usually in smaller companies that are taking a small risk and paying minimal to no dividends. The difference between the two goes back to the fact that there are two ways to make money in the stock market. A stock can see an increase in value titled capital gain, or you could have a dividend. There are mixed opinions on which one will make the most money, depending on the different criteria and tax situations. Let us first consider the facts of what differentiates index investing:
There is plenty of money that is on the line within the stock market, so much of which attracts several intelligent investors to collect it. Because of this, there are very few strategies that still work today that do not copy some of the characteristics of thousands of other plans and strategies tried by other people.
What works today is quickly copied tomorrow and, eventually, reduces any advantage that it once had. One of the biggest challenges of trying to come up with a unique index investing strategy is being able to understand it and applying it to work within an investor's portfolio. For both of these, most people have a hard time adjusting, which means index investing is usually a good route for them. At the same time, investors for both index and dividends have several commonalities, which include having the same approach regarding the buying and holding of stocks for a longer period of time. Those who invest using either of them will usually have a portfolio of larger, stable companies that provide steady cash flow and are not too much of a big risk to the investor. But what makes dividend investing an attractive option? One is that investors can pick out their stocks that have a higher chance of outperforming the average market numbers by using formulas and growth statistics based around dividends. The only argument is that more will eventually follow the same path and begin to make similar stock moves that will begin to level the competitive market again. There is also a constant line of dividends, which can become an income that is more tax-efficient to the investor. On the other hand, if stocks remain in registered accounts, such as a Tax-Free Savings Account
(TFSA), a Registered Retirement Savings Plan (RRSP), or a Registered Education Savings Plan (RESP), the advantage is almost void. But if those registered accounts are all filled up, that could be extremely beneficial for the investor. Finally, dividends are considered a good option to boost an investor's self-esteem to stay in the market, especially if the stock market, all of a sudden, takes a big hit and moves down the graph. Being able to have that mental boost can be beneficial when other investors are in a panic to sell off their stocks, giving you a good chance to buy cheap for larger money gains later.

At the same time, stocks are usually arbitrary to pick regardless of the approach used, so there are still no guarantees in the competitive market. Every investor is going to have their own opinion on the correct way to pursue the big dollar signs they see in the stocks stashed away in their portfolios. Of course, there is plenty of strategizing and studying that can lead to making the best choices possible, but even then, there is still at least a tiny bit of risk that can foil your plans. The question becomes whether you want to take a big risk in exchange for the bigger reward or play it safe and have a low-to-moderate income with the thought of "something is better than nothing."
How Dividend Investing Can Fit into Your Retirement Goals
The concept of retirement can be mentally draining. You are already working as hard as you can to provide for your family, and then you have to have money after work.
That is not to say that you are in a career where you have to be forced into retirement, but everyone looks forward to the idea of being able to sit on a porch with lemonade on a sunny day rather than put on a suit and go to a busy office. Alas, to be able to reach that dream, you have to have enough money saved up to live on for years, and many folks use an individual retirement account (IRA), which come in various forms because the right type of investments can lead to building up that stockpile of money. That, in itself, is a challenge that can overwhelm a good number of people. First, let us look more into the Roth IRA that people prefer to use to build toward their retirement goals. These IRAs are savings and investment vehicles that have some tax benefits that are more beneficial than a typical investment portfolio.
While a traditional IRA provides an opportunity for an investor's contributions to be made with income deposited before tax is taken out, those distributions are taxed as any other form of income you that would earn from the 40-hour workweek. But when you consider a Roth IRA, those contributions into the stocks are taxed, and the money that is returned to the investor is free of any taxes. Roth IRAs are usually free of taxes when the time comes to get the return on the investments with income that has hopefully built up over time with the power of compounding interest. This means there is a chance to have dividend stocks in the portfolio that pay well and are not being harvested by the greedy IRS tax people. Sure, you have to pay more to get into the party, but the benefits are too great to pass up. So how does the process of dividend investments fit into your retirement goals? A good, dependable dividend investing plan can be the right choice when looking for a portfolio that can build long- term wealth to eventually provide the income to enjoy retirement without any worries of being able to afford not working. One of the biggest factors that attract some retirement planners is the ability to use the power of compounding interest that is found in dividend investment strategies.
Compounding the interest by reinvesting the money you gain regularly requires being able to have a good starting amount of money to be the initial capital, and then investing it in strong equities and letting the price appreciation to be shared and the dividend payments to grow to the point of providing a good base to live on when you do actually retire. Because you are making your dividend investments through something like a Roth IRA, the earnings from those investments are exempt from any taxes that usually hit the money you earn, in many cases, taking out as much as 30 % between state, federal, and an additional federal withholding tax. That is one of the main reasons that people like to use dividend investing as part of their retirement plans. Since Roth IRAs have these tax-free distributed payouts to the shareholders, those returns are more than just the key contributors to the wealth built up for a person's retirement.
Let us add to the fact that the income that comes from the withdrawals of those dividend returns is tax-free. But these IRAs have one disadvantage—of course, there's always a catch—in the sense that these accounts mandate contributions that come from taxable, earned income. On the other hand, the rewards that come from sticking to the plan for several years of dividend investing within a Roth IRA will outweigh those shorter-term costs that one would have to pay upfront. But is the Roth IRA a perfect fit? Well, there are a number of things to consider when choosing between tradition and Roth IRAs: A traditional IRA provides tax-free contributions, while the Roth IRAs offer tax-free income. Roth IRAs provide an advantage in withdrawal taxes since they are not taxed like traditional IRAs. You cannot take out funds without penalty from a Roth IRA until you turn 59-and-a-half years of age, and the IRA has been established for five or more years. A traditional IRA has the same rule, but the money must be withdrawn before 70-and-a-half before a 50 % penalty. There are no limits on contributions within a traditional IRA, but Roth IRAs have a few restrictions, such as the limit on the number of contributions each year if you make more than a certain level of income. Regardless of which IRA type, you will have until April 15 each year to make up the contributions from the prior fiscal year. Overall, those who expect to be taxed at a rate higher than the current income tax when you are expecting to retire—based on tax bracket levels—consider opening a Roth IRA. In the end, different individuals will have their own needs when it comes to how they plan for their retirement. Not everyone can just start at age 18 or in their early 20s. A lot of it depends on their current and potential financial situations down the road, which can affect whether investing in a Roth IRA is the best option for an individual's retirement plan. One way to help in the decision is to know where a person may end up within the tax brackets when they do decide to retire because the Roth IRA may prevent an opportunity to stay away from the higher income tax rates later on. But whatever decision is made on the type of IRA that will form a retirement plan, the main goal is being able to find the best type of investment strategy that can make those golden years of comfortable and relaxing retirement more achievable, which is easily possible with dividend investing within a Roth IRA.
What Is Dividend Investment?

Generally speaking, dividends are referred to as the distribution of the after-tax earnings of a company to shareholders in relation to the number of shares they hold. Mind you, there are 3 parts to this definition, and each one is equally important. Firstly, dividends are paid from profit and not from any other source of equity, for instance, paid-in surplus. Secondly, dividends must be in the form of real assets, and this part is quite tricky. It is a common habit for companies to pay out dividends in the form of cash, checks, or more stocks since these are convenient. However, it would be quite difficult and nonsensical for an airline company like Boeing to offer the right-wing of a 747 to a major shareholder as dividends. Nevertheless, during high levels of inflation, we have seen corporations pay dividends in the form of products that they sell. Finally, the third part of this definition states that every shareholder has a share in dividends irrespective of the number of shares that they hold in the company.
So, How Did It All Start?
You might wonder: how did companies start paying dividends, and who started the whole concept? Well, dividend-paying stocks have been around for hundreds of years, and it has provided an infallible source of passive income to investors for many generations. Here is the outline of the history of dividend-paying stocks.
1250 — A French bank called Societe des Moulins du Bazacle was the first company to pay out dividends.
1602 — Nearly 400 years later, the Dutch East India Company became the second corporation in history to pay out dividends. Over the course of its 200-year existence, this company paid out 18 % of its capital.
1682 — Dividend investment finally came to North America officially. The Hudson Bay Company is arguably the first to pay dividends; the first dividends were paid about 14 years after the inception of the company in 1670 and were worth half of the stock value.

1910 — In the early 20th century, many investors were only interested in stocks paying dividends. During this period, stocks were expected to have higher dividend yields than bonds in order to compensate investors for the risks that come with most equities.
2003 — After 28 years of growth, the tech giant, Microsoft, declares its first dividend payment.
Today, about 420 companies out of the 500 company stocks on the S&P 500 pay a dividend. This includes giant corporations like Chevron, McDonald's, and Wal-Mart.

Terms to Know in Dividend Investment
Before we proceed to the countless benefits of dividend investments as a passive income, here are a few terms you first need to get familiar with. These terms will not help you to breach the world of dividends but will enable you to make better financial decisions during investments.

1. Cash Dividends

Cash dividends are cash payments made to shareholders as part of the company's accumulated earnings or current profit. This is a way for the company to return profits to investors for the shares they hold. Companies pay out dividends monthly, quarterly, or yearly. Besides normal dividend payouts, shareholders can also receive special cash dividends after legal settlements or one-time cash distribution.
2. Declaration Date
This is the date on which the board of directors in a corporation announces the next dividend payment. Also referred to as the announcement date, the board of directors announces the ex- dividend date, the dividend size, and the payment date.
3. Dividend Cover Ratio

The Dividend Cover Ratio is the ratio between a company's net dividend to shareholders and its earnings. This is an analytical tool used by investors to gauge if a company's earnings can sufficiently cover its dividends to investors. You can calculate this by dividing the earnings per share by the dividends per share.
4. Dividend Reinvestment Plan (DRIP)
This is a plan offered to investors by dividend-paying corporations to reinvest their cash dividends. The DRIP is an amazing strategy that you will come across in the course of this book. By re-investing your cash dividends into more shares, you will earn higher dividend payouts. Furthermore, most Dividend Reinvestment Plans allow investors to buy additional shares at a discount and without commission. However, most DRIPs do not allow a reinvestment that is less than $10. If your company does not offer a DRIP, you can set one up with a major brokerage firm.

5. Dividend Yield
Dividend yield is a term you definitely need to add to your repertoire. It is a financial ratio that, in relation to its share value, depicts the amount a company pays out in dividends each year. You can measure the dividend yield by dividing the yearly dividend per share by the share price. This term represents the total amount of return from an investment, and it is the perfect tool to measure potential investments. Here is how to calculate a dividend yield. Let us assume that Company ABC is trading at $40 per share, and the company offers a yearly dividend of $1.5 per share. Therefore, the dividend yield would be at 3.75 %. You may have noticed that the share price and dividend yield move in the opposite direction. If we selected a higher share price of $60, for example, the dividend yield would decrease (1.48 dividend ÷ $60 per share equals to 2.45 % yield).

Therefore, you can earn more dividend income if the share price is lower.

6. Record Date
Companies determine their shareholders on the record date.

7. Ex-dividend Date
The ex-dividend date is one of the four main important dates to dividend investors. This is the fixed duration, after which a security is traded without a formerly announced distribution or dividend. Additionally, it is also the date on which the seller of a stock will be entitled to a recently declared dividend.

8. Payment Date
This is the date on which a stock dividend is scheduled to be paid to shareholders. You should know that only those who bought their shares before the ex-dividend date can receive dividends on the payment date.

9. One-time Dividends
Also referred to as special dividends, these payments are larger than the conventional dividends paid out to shareholders.
Rules of Dividend Investments
Dividend investments, just like any other niche, comes with its own set of rules. Think of these rules as shortcuts to avoid making common mistakes. These rules are backed by academic research and principles from some of the world's greatest investors. Mind you, do not think of these rules as infallible since there will always be an exception. Nevertheless, it is good to integrate these rules into your everyday investment decisions.
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