Dividends are returns you get on stock purchased of a company. When a person buys stocks, he basically becomes a partial owner of the company. Thus, when the company earns profits, the partial owner gets paid part of those profits.
The way stock-holding companies work is one of these two:
- Re-investing the profits back into the business, leading to a rise in stock value
- Paying out the profits to the stock-holder in the form of dividends
Simply put, dividends are the company’s profits, and as dividends are paid per stock, the more the number of stocks owned, the higher the dividends paid. This also implies that the higher the profits earned, the higher are the dividends paid out.
Stock, however, needs to be owned before the ex-dividend date if dividends are to be paid out to the stockholder. This date is set by the stock exchanges and not by the company itself. As a stockholder, you would need to buy your stocks on or before the ex-dividend date to be eligible for dividend payouts.
Dividends as a Retirement Income
Carefully invested stocks can lead to a comfortable nest egg that can support a person through their retirement age. To build upon this, there are several ways you can ensure that the payouts will keep coming.
- Investing in a company which has a steadily increasing trend of dividend pay-outs can form a retirement income that keeps pace with steadily rising inflation. To get a list of companies which have historically paid out increasing dividends over the years, you could refer to Dividend Aristocrats. This is a list of publicly traded companies that have maintained a policy of regularly increasing dividend payouts at every few periods and can be found on the Standard & Poor’s (S&P) Dividend Aristocrats page.
This is a comforting deal for persons who are not ready to invest in high-risk stocks, and yet have the security of assured quarterly pay-outs.
- A stockholder may also choose to purchase stocks which offer high dividend payouts, rather than those which offer steadily increasing payouts. This is made easier by websites which do the complicated work of screening high-dividend paying stocks for you. By referencing and researching these sites, you can invest in higher pay-outs which can help build up a nest egg.
In the short run, this is a safer bet than relying on an annually increasing dividend income.
- A stockholder may also invest in a dividend income fund rather than buying individual dividend paying stocks. In this manner, you would own many stocks, each of which would pay out a small dividend. The dividends of all these stocks are then collected and paid out at the end of each quarter.
Such smaller stocks own a lower risk of losing their basic value, and by owning several such small stocks, you are still assured a comfortable dividend pay-out.
A Word of Caution
It is pertinent to be careful when investing in stocks. If you choose stocks only for their high payouts, you would run the risk of buying stock from a company that is in trouble. Typically, the dividend payout of a company appears to have increased when it is in trouble because it is compared to the lowered stock value.
A company that is in trouble could lower its dividend payout at any time due to lowered profits, dragging its stock value down with it. If you are not good at screening such stocks, you would be safer sticking to a stock fund that has previously worked for you. You can find our undervalued dividend growth stock screener criteria here.
To sum up on dividends as a tool for retirement income, it is important to remember that investing in stocks is always a risky matter. Stock values are never steady in the share market and will sway as the company functions. And therefore will the income vary.
But if you stick it out, the dividend income will be worth the perseverance.
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