Dividend investing is a great way to get free money from companies. In this video, I’ll talk about everything relating to dividends. What are dividends? Why do companies pay them? How do you qualify for dividends? And should you invest in dividend stocks? Enjoy
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0:00 – Introduction
0:48 – What Are Dividends?
As most of you may know already, companies pay out dividends in the form of cash to shareholders. But not all companies pay dividends. The dividends may not always be cash, sometimes, companies will also pay dividends in the form of stocks, called scrip dividends.
1:27 – Why Do Company Pays Dividends?
1. Reward shareholders
Company pay dividends to reward shareholders of the company, which is investors like us and the management of the company. Because of this, investors’ interests and the managements’ interests will be aligned. Both of us will want the company to do well, so that we will receive more dividends.
2. Excess cash
Generally, mature companies with stable earnings will choose to pay dividends. The bigger they are, the slower they will grow, and it’s actually riskier to continue a high level growth. As a result, they don’t have any good way of using all of the money to grow themselves, so instead they would rather distribute the money to shareholders than to keep it. On the other hand, fast growing companies prefer to distribute lesser dividends or won’t even distribute dividends, because they are able to reinvest the money in themselves and grow themselves quickly.
3. Signify strength
Once the company start paying dividend, they would try their best to continue paying. It’s the same for companies, even if the company earnings drop, their dividends generally do not drop as much. It’s to show shareholders that the company is confident in its future despite the current financial issues. A study showed that dividends do not drop as much as earnings in the past. However, if not done carefully, this might end up hurting the company. In the past, there were companies who went so far as to borrow money to pay dividends. If that happens, avoid these kind of companies, because dividends should come from profits, not debts.
5:24 – How To Qualify For Dividends?
To qualify for dividends, you need to own the stock 1 day before ex dividend date, which is on cum dividend date. Then you will receive the dividends on payment date. Trying to time dividend dates is useless because stock price will fall on ex dividend date, and stock price will generally rise before ex dividend date and fall on ex dividend date. The best way is just to buy and hold the stock to receive a steady dividend.
8:29 – Should You Invest In Dividend Stocks?
By investing in dividend stocks, you will receive a steady income, but the total return is lesser. On the other hand, investing in growth stocks which doesn’t pay dividend will give a higher return. So, it depends which you prefer.
10:03 – My Thoughts
Right now I feel that I do not need the dividend money. Even if I reinvest the dividend money to compound it, it will never grow as fast when compared to a growth company. However the downside is the growth of a growth company is not guaranteed, many things could go wrong. As i do not need the dividend money now, I would rather invest in growth companies to grow my money faster. Then when nearing retirement, I will convert my growth stocks into dividend stocks to have a stable passive income.