Understanding the Dazzling World of Dividends

Investing in dividend-paying stocks can serve as an important pillar of your investment strategy, and it is a tried-and-true way of creating long-term wealth. Read on to learn about the dazzling world of dividends and how they can help you on your financial journey.

What are Dividends?

Dividends are payments that companies make to their shareholders. In other words, these dividend payments allow for publicly-traded firms to share their earnings with their owners.

Dividend-paying companies make payouts on a regular basis, most often every quarter. This gives shareholders in dividend-paying companies a regular source of income, so they can earn money without having to sell their stock holdings.

In practice, if you own 10 shares of a company that pays out a $1 dividend every quarter, you will receive $10. This can add up over time, especially if you re-invest these earnings back into your portfolio.

TipRanks’ dividend calculator provides investors with the ability to review numerous dividend-paying stocks and understand the potential value that these investments could generate.

Which Companies Pay Dividends?

There are a number of dividend-paying companies, which tend to be larger, more established, and profitable companies.

When purchasing stocks, investors must constantly weigh the risk-reward equation to understand if the investment makes sense for them. The goal, of course, is to buy low and sell high, making a tidy profit along the way. The delta between the price of acquisition and where the stock is eventually sold is where the profits (or losses) reside.

There are many reasons that the prices of stocks will rise, among them the future growth prospects for the company in question. Large companies–ones that are already central players in their industry–have fewer options for major growth. Dividend payments to shareholders are one way to make the company’s stock more attractive to potential buyers.

There are certain companies that are reliable dividend payers, including those firms referred to as dividend aristocrats. Digital aristocrats are companies who have increased their dividend payments for at least 25 years.

While past performance is no guarantee of future payouts, it is of course a strong indicator. You can use the TipRanks Dividend Center to explore numerous dividend-paying companies and discover which ones could be a good fit for your portfolio.

How are Dividend Payments Calculated?

Dividend payments are decided upon by the company’s Board of Directors, who must approve the payments to shareholders. Companies will base their dividend payments on a Target Payout Ratio, which is essentially the percentage of profits the company intends to share with its shareholders.

There are a couple of important factors to consider when thinking about the target number and the subsequent dividend payment calculation.

For starters, dividends that are being paid out are not being re-invested back into the business. This can limit opportunities for future growth, as the company is not using its revenues to develop new product lines or expand into additional markets. By definition, money consumed or spent is not being invested into other opportunities.

In addition, for the better and also for the worse, markets will respond to this information. An increase in dividend payments is a sign that the company is doing well, with a healthy business model that is consistently earning revenue and profits. A decrease–or even the cessation of dividend payments–could be an indication that the company is struggling, and markets will likely react accordingly. For this reason, companies tend to be conservative when deciding upon this target.

How are Dividend Yields Evaluated?

A dividend yield is the amount of dividend paid, divided by the price of the stock. This calculation can give you a sense of your expected dividend returns when compared with the overall cost of your investment.

Though it can be a useful indicator, dividend yields should not be viewed in a vacuum. Because it is a ratio, companies whose shares are trading at higher prices will have relatively lower dividend yields. That does not necessarily mean that they are not offering substantial dividend payments, and is more of a reflection on the high price of the stock.

For this reason, dividend yields should be thought of as one piece of your investment puzzle. It is always a good idea to take additional pieces of information into account, such as the company’s overall health and trajectory.

Conclusion: Understanding Dividends

Dividends can serve as an important part of your investment portfolio. By sharing their revenues with shareholders, dividend-paying companies can provide investors with a regular stream of income.

TipRanks’ Dividend Center can help you understand which companies can be expected to pay dividends, based on both historical performance and the overall health of the company.

Learn money management, and use data-driven stock insights with TipRanks.