Equity investing can be a smart choice for your money as part of a mixed and balanced portfolio of investments. There are two ways to generate returns from your equity investments – from dividends and from gains in value.
Gains in value refer to the fact that as the business you have bought equity in makes profits, expands and develops the share price in the stock market will rise. This means you can sell your shares at a higher price than what you bought for if you want to. Selling it means you would have made money on your investment. Otherwise this will mean that the value of your portfolio has risen. Dividends, on the other hand, are a distribution of a company’s profits.
If you want steady income and a cushion against declining stock prices, then the answer is a resounding, yes – dividends are a good investment stock strategy. Dividends are quarterly payouts in stock or cash based on a percent of the stock price.
What are dividends?
When you own a share in a company, you own a small part of that company. This means as an owner you are entitled to a part of the profits. Dividends are a form of income that may be paid to you on your investment and is a distribution of company earnings. The amount of the dividend is decided by the board of directors and shareholders of that company. They will decide how much the dividend will be and the timing of the dividend.
A company’s net profits are not always distributed as dividends. The majority of profits may be kept within the company as retained earnings and used to add value to the business. The company may decide to use profits to repurchase their own shares in the open markets in what is called a share buyback. Dividend payments are not guaranteed or even regularly paid. They may be structured as a one-off special dividend and in some cases, they can be a frequent ongoing income stream for shareholders for a period of time.
The dividend payment can come in a range of different forms. The most typical forms are cash payments and shares in stock of the company. However it is possible that you will receive dividends in other payment methods. For example, you may receive a voucher for that business’ product and services or some other kind of asset or property. Mutual fund and ETF shareholders can also receive dividends depending on the investment selected.
How do you get dividend?
Often, you will see the dividend to be paid quoted on a per share basis. Most commonly dividends are paid in cash – it will be quoted as $X per share for example. The dividend payment will be decided in advance at a general meeting of board directors and shareholders, at which time the payment amount and timing will be set for a given dividend. Your dividend will normally be directly paid into your trading account on the dividend date in the case of cash or share dividends.
How it works?
Each company is different and will offer a different dividend policy to their shareholders. One example is a stable dividend policy – this means a company will offer to pay a stable dividend amount over a stable schedule even in times of poor earnings. This is not the same as a constant payout, however, which involves a company paying out a specific and pre- defined percentage of its earnings every year as dividends. The amount of these dividends varies directly with earnings, which is similar to the case of a residual dividend policy.
A residual dividend policy provides you with dividend payouts, which are based on earnings after the amounts for financing equity capital, are taken out of profits – residual profits are paid out to shareholders as dividends.
Why do you want dividend?
One major benefit of dividends is an uncertain future. You do not know with certainty that your investment will perform as well as you may expected, despite all the research you may have carried out. A return on your money invested in your hand today is better than waiting for uncertain gains tomorrow. Also beware – if the company you have invested in has a history of paying a dividend in a stable and frequent manner, and suddenly the company stops paying dividends, this may be a sign of financial difficulty at the company and you should take another look at your investments credentials.
Example: US Equities
A high profile US stock example is Apple. To begin with, Apple has a lot of cash in the business so this is a strong sign of an ability to pay a dividend on your investment. The company has paid regular cash dividends over the past two and a half years on a quarterly basis – with the last three payments being $.47 decided on Jul 22nd 2014, Oct 20th 2014, Jan 27th 2014 and paid on Feb 12th 2015, Nov 13th 2014 and Aug 14th 2014 respectively.
You can find the dividend and financial history of publicly listed companies on line to get an idea of the style of dividend payment for potential investments. Another example is Coca Cola which has paid consistent regular cash dividends every quarter. The Coca-Cola Company has paid a quarterly dividend since 1920 and has increased dividends in each of the last 50 years.
Example: Singapore Equities
Singapore Press Holdings is a company that is the main newspaper publisher in Singapore – currently trading at a share price of S $ 4.15. They announced final dividend of S$0.08 for financial year of 2014 in addition to a special dividend of S$0.06 for the financial year in October 2014 which was paid December 23rd 2014. They have a high historical dividend rate of above 9%. This is a great dividend stock as compared to investing in, for example, an ETF such as the SPDR STI ETF – which is an exchange-traded fund that tracks the Straits Times Index and has achieved a yield of between 2 and 3% over the past year.
Overall, dividends can be a great return on your investment but they can be infrequent and it is best to research the history of the company first before putting in your money.
They are especially attractive in a low interest rate environment when government and corporate bonds, and other income paying investments are delivering low returns.
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