Dividends are nice.
They are payments made to shareholders out of the money a company makes. For example, if you have 100 shares in Glaxosmithkline and they pay a yearly dividend of £1.00, you would receive £100.00 a year from Glaxosmithkline in dividends (100 shares x £1.00 dividend).
Not all managements will agree to pay its shareholders dividends.Apple for example only started paying their shareholders a dividend in 2012. Some companies never pay a dividend.
Dividends can also form part of an investment strategy like this one if you would like to create an income from your investments.
Whether a company pays a dividend or not is something you will need to assess and make part of your investing strategy before you purchase your first shares.
Here are a few suggestions:
- What is your reason for investing? If you would like to receive income whilst you invest then you need stocks that pay a dividend. If you pursue a purer value orientated strategy then dividends are not so important. In some cases a lack of dividend may actually alert you to a value investing opportunity.
- Check the numbers. A company’s ability to pay a dividend is dependant on its ability to continue making a profit. But because the future is unknown, check the dividend payment history of a company going back as far as records go. If you can’t be bothered with that, check at least 10 years’ worth of dividend payment history.
- Review the company’s financial position. Dividends can only be paid when a company is in good financial shape and management are willing to pay a dividend. Use screeners to check whether a company pays a dividend whilst taking account of the health of their finances.
Even though dividends can increase your wealth, shares should not be purchased just because the company pays a dividend;research the company thoroughly.
Dividends are small portion of profits of the company that are distributed to shareholders.