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what are dividends

What are dividends and how to earn some yourself

Investing in the stocks of a company brings some benefits. It not only protects your savings from inflation, but it also lets you earn some dividends. But… What are dividends? How can you earn some yourself?

When we talk about what dividends are, several questions arise. So first we will be answering some basic questions and then we will touch on some points you would need to know how to earn some. Let’s begin.

What are dividends?

Dividends are a benefit that a company gives its shareholders in exchange for their investment. At the end of every accounting period, the company analyzes its economic situation and, in case of having revenue, decides what portion of those earnings will be distributed among its shareholders in the form of dividends.

They could be paid in cash or in the form of extra stocks and they usually provide a good perspective on the state of a company’s health. The price of a stock typically goes up on the announcement of a dividend payment as they tend to inspire trust in investors.

Not only publicly traded companies pay out dividends. Some exchange-traded funds and mutual funds also do.

When are they paid?

As we already know, dividends are not a required payment. That’s why every company chooses its own payment frequency, and whether to pay them or not. Generally speaking, companies that pay dividends distribute them every month, quarter, or year. 

Dividend-paying companies follow a process of events to distribute their dividends and to determine qualifying shareholders. These are the important dates for such a process:

  • Announcement: Dividends are announced by the company on the announcement date after being approved by shareholders.
  • Ex-dividend date: This is the date on which the dividend eligibility expires. If an investor buys a stock on the exact ex-dividend date or after, they will not be eligible to receive the announced dividends.
  • Record date: This is the date on which the company decides which shareholders are eligible to receive dividends.
  • Payment: The company issues the dividend payment to investors and the money gets credited to shareholders.

How are they paid?

A company may opt to keep its profits to use them for future projects and business initiatives. However, it also may decide to distribute a portion to shareholders as dividends. That’s why, in order to be issued, payments need to be approved by voting rights. 

A company that decides to pay dividends can choose between different methods of payment.

  • Residual: Companies decide to use their residual earnings to pay dividends to their shareholders and reinvest in the company.
  • Stable: Companies pay long-term dividends with a percentage of their profits.
  • Hybrid: Companies establish a fixed dividend that represents a small percentage of the business’s annual revenue. When the company has more revenue than expected, it usually distributes an extra dividend to its shareholders.

How to earn dividends?

It is evident that as an investor, you’ll want to earn a portion of the company’s earnings to have a source of income. Even more so now that we already know what dividends are.

Nevertheless, it is important to consider that not all companies pay dividends. For example, companies that are in a growth stage usually keep their earnings to reinvest them. On the other hand, it is common for big international companies to pay dividends.

Invest in dividend stocks

If you want to earn dividends, you should invest in companies that have dividend stocks (forgive the redundancy). Make sure to analyze the company you want to invest in and compare its dividend payout ratio against other options.

One of the wisest tips to earn money in the form of dividends is to use the power of compound interest. By reinvesting your payments, you’ll see how your investments will grow little by little, making you a creditor of a more significant portion of the company’s earnings.

Dividend aristocrats

There are a bunch of companies that belong to the S&P 500 index that have a consistent record of consistently increasing the size of their dividend payments. These are companies that are in a mature state so they don’t need to keep their profits for growth plans.

The number of companies that are considered aristocrats is relatively small. In order to be considered as one, a company must have raised its payments for at least the past 25 years.

Investing in aristocrats may be a good option for you if you are looking for a stable investment vehicle that provides a steady income and make your money grow over time.

Use the dividend yield

If you eventually have some trouble deciding which stock to invest in, you may use the dividend yield to help you make up your mind. This is a measure that helps you to see how much you earn in dividends compared to the price of each stock.

In other words, by calculating the dividend yield you can know what percentage of the amount you paid for a specific investment returns to you in the form of dividends. So, if you’re comparing different stocks, the higher the dividend yield is, the better investment option is in terms of dividend payments.

Finally…

Today we learned what dividends are and answered some basic questions about the topic. Chances are that after reading this post, you got the investing fever and want to turn into a successful shareholder of companies that pay dividends. 

If you’re looking to invest in dividend stocks, make sure to take a look at the FlexInvest platform. It will give you instant access to hundreds of the most important dividend-paying companies in the world and let you invest in them with only $5.

Also, before going at it, make sure you explore the rest of the articles in our blog to learn a little more about investing strategies to get yourself ready for your investing journey.

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