Dividend Stocks: The Essential Guide

This is a guest contribution from Dividend Appreciation

Ben Graham once said that investing was most intelligent when it was most businesslike. In other words, investing in stocks is basically investing in businesses. And nothing guarantees success in business like pragmatism.

The logical investor will understand that stocks are nothing more than small pieces of different businesses. The whole point of going into business is to earn a return. If, for example, you had $100 you could leave it at the bank to earn 2% interest or invest in a company that probably earns more.

But earnings are unpredictable and much of the money made over the course of the year is actually invested back into the business. For investors who want to see tangible returns on their money or need the cash to live on, earnings don’t matter as much as dividends.

Dividends are known to be a lot more stable and predictable than company earnings. Every year, the company’s management gets together to announce a set dividend. Over the course of the year the dividend is paid out in a fixed amount on a set schedule. A lot of companies pay a significant amount of annual earnings in this form. Some have dividend yields that are much higher than interest rates on savings accounts.

All these factors have made dividend investment strategies a lot more popular. Here’s a simple guide to everything you need to know about this traditional investment technique.

The Source

If you want to understand dividend investing you need to start with their source. Understanding the link between dividends and profits is essential for any income seeking investor.

Of the 505 stocks listed on the S&P 500, only 85 do not pay a dividend. Of the 420 that pay a dividend most yield less than the yield on a 10-year US treasury bond. This means less than half of all stocks on the general market pay a dividend worth investing for.

Dividends are subject to change. Companies can either cut the dividend or stop paying it altogether if things go wrong. For example, American Capital Agency Corp (AGNC), Potash (POT), Williams Cos (WMB) and the iShares US Preferred Stock ETF (PFF) all cut dividends in 2016 for a number of reasons ranging from miscalculated credit risks to a fall in commodity prices.

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Disclosure: 

Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.

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Chee Hin Teh 4 years ago Member's comment

Thanks for sharing