A Quick Word on Dividends
Some companies pay dividends to their shareholders. A dividend is basically a dollar payment from the company to the shareholders. Companies use dividends as a reward for shareholders. Often times big dividend payers are usually slow or medium growers that have exhausted other avenues of growth. These slower growers use dividends to attract and keep investors. After all, why would invest in a slow grower if there weren’t any dividends?
There are many advantages to dividend paying stocks. First, and most importantly, you get to receive a dividend which you can reinvest or use for some other means. Also, dividend stocks usually perform better during recessions.
Whenever you buy a stock for the dividends you want to check and see if the company paid or increased the dividend during the last two or three recessions and if the dividend has increased every year for the last ten or fifteen years.
Most stock quotes usually mention the dividend yield. The dividend yield is simply the percentage of the share price that is paid out as a dividend. You can find the dividend yield by dividing the dividend paid by the share price. You might think that it is best to find stocks that have the highest dividend yield possible, but often time’s super high dividend paying companies have problems that turn investors away. At StockBoxFinancial, we are usually wary of companies that pay a dividend higher than five percent.
Another important item to consider with respect to dividends is the payout ratio. The payout ratio is the percentage of earnings paid out as dividends. The payout ratio is found by dividing the dividend by the earnings per share. In most cases, you want the payout ratio to be less than 50 percent to ensure that the company is reinvesting some earnings back into the business. If you want to learn more on dividends and about the importance of reinvesting dividends you can check out a StockBoxFinancial article on the subject by clicking here.