What Are The Benefits Of Investing In Dividend-paying Stocks?

What Are The Benefits Of Investing In Dividend-paying Stocks? – One of the reasons we invest is to build a steady stream of passive income. It is a means of improving our financial position by providing a platform to generate additional cash flow.

One of the most accessible ways to get passive income is through dividend investing or income investing. It’s not hard to see why this is a popular way to invest in Singapore, a market with relatively high dividend yields.

What Are The Benefits Of Investing In Dividend-paying Stocks?

Passive income can supplement our salary, help us get through gigs, and help us better prepare for retirement. Also, receiving dividends or distributions from your investments is the most obvious way to feel the benefits of investing.

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Dividend stocks are popular or preferred by income investors, usually mature companies with steady income, earnings, and cash flow. The shares of many of these companies are also known as Blue-Chips.

Typically, these companies aren’t high-growth companies, but they have experienced steady earnings growth for many years and are generally considered less risky than high-growth stocks.

While high-growth stocks may have more advantages, such companies are currently using a lot of cash flow to expand, leaving very little for dividends.

Because older companies often don’t expand aggressively, most of the profits can be returned to shareholders in the form of dividends.

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Conversely, smaller, high-growth companies require more money and resources to grow and expand their businesses, leaving less money to pay dividends to shareholders.

The dividend payout ratio is the percentage of a company’s profits that are paid out to shareholders as cash dividends. This number is usually expressed as a percentage.

Among other things, it is considered an indicator of the sustainability of a company’s dividend payment stream.

If a company is large, stable and no longer wants to grow strongly, most of its profits will be returned to the shareholders.

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There is no universal standard for the ideal payout ratio. But since dividend-seeking investors look for a relatively high payout ratio, a reliable number to work with can range from 40% to 50%, depending on who you’re dealing with.

On the other hand, you might consider avoiding companies with very high payout rates (>80%).

There are two reasons for this. First, a company is vulnerable to a dividend cut when profits fall. Second, a very high ratio indicates that a company is issuing more dividends to shareholders rather than reinvesting earnings for sustained growth, which can make investors less likely to raise more capital.

If a company has a low payout ratio, ask yourself why the company is holding cash. A business can do this to finance a future purchase.

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Unless they have a good reason to do so or have no way of generating extraordinary returns for shareholders, most of the profits should be paid out as dividends.

Dividend investors won’t be satisfied with a large, successful company — with profits to pay out — if the company chooses to pay inconsistent dividends.

Also, check if companies have paid higher dividends over the past 5-10 years. This shows that as the company becomes more successful, management is willing to share the fruits of their labor with shareholders.

In the US stock market, companies in the S&P 500 index have reported an increase in dividends to shareholders every year for the past 25 years.

How Dividends Work

Many dividend investors tend to overlook the general aspects of a company’s fundamentals, focusing primarily on the value of the dividend they can receive.

These investors only look at a stock’s dividend yield, which is typically calculated as a percentage of dividends per share over the past 12 months at the stock’s current price.

As the most commonly used measure of dividend yield in dividends per share over the past 12 months, it is a historical measure based on current prices. In this case, the dividend yield does not take into account future dividend projections.

So while dividend yield is an important metric for income investors, it’s also important to consider the overall health of the company.

Tips To Pick Quality Dividend Stocks

A company with deteriorating fundamentals (eg, revenues, earnings, cash flow, competitive advantage) cannot sustain long-term dividend payments. The less revenue and profits, the less dividends can be paid.

Over time, a company with declining sales and profits will depress its stock price as investors realize that the company is no longer in business. This drop in value will wipe out any dividend gains you may have initially, leaving you behind in first place.

So always make sure that the company you want to invest in is fundamentally strong and healthy for many years to come.

As a dividend investor, you may want to invest in a company with a low capital expenditure (Capex) plan and commitment.

The Benefits And Risks Of Investing In Dividend Paying Stocks

A large-cap company will reinvest its profits to expand its business, which will leave fewer profits to distribute as dividends. For example, airlines have very high Capex, as they have to constantly maintain and upgrade their fleets.

So, if you are looking for dividend stocks, look for one that can support/grow your business with its minimal investment cost requirements.

After all, a company must have real money (not just book income) to pay dividends to shareholders.

A company may have accounting profit but have negative or inconsistent free cash flow. Such companies will find it difficult to pay stable dividends.

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A small business looking for growth may experience negative free cash flow as it expands. But a large, stable company that dominates its industry should be able to consistently generate strong free cash flow.

The dividend yield you receive must exceed the risk-free rate in your country of residence. The risk-free rate is the lowest return you can theoretically make in a “risk-free” period.

In the US, if you plan to invest your money for 10 years, the risk-free rate is typically based on the yield on 10-year US Treasuries, which at press time is 3.51%.

In Singapore, the risk-free rate is the lowest rate you can get on very low-risk instruments, such as Singapore government bonds, a type of government bond.

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While they aren’t exactly dividend stocks, investors often add them to a dividend-oriented portfolio with real estate mutual funds (REITs).

The reasons are clear and simple. In Singapore, REITs require 90% of their earned income to be distributed as dividends to those they don’t yet own, an attractive proposition for those looking for an income investment. Distributions to participants, quarterly or semi-annually, are tax free.

Globally, REITs have delivered high total returns (unit price increases + distribution to non-buyers) over the past two decades.

If you plan to invest in dividend stocks, always remember to carefully scrutinize and focus on quality companies with a dividend payout ratio of 50% or higher, with a stable dividend history, and sustainable business principles, among other factors .

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Also, remember not to let the high dividend yield cloud the stock’s future prospects.

Talk to a Wealth Plan Manager today to check on your financial health and how to plan better.

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This article is for informational purposes only and should not be relied upon as financial advice. Before deciding to buy, sell or hold any investment or insurance product, you should ask a financial adviser about its suitability.

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All investments are risky and you could lose money on your investment. Invest only if you understand and control your investment. Diversify your investments and avoid investing a large part of your money in a single product issuer. The dividend yield, expressed as a percentage, is a financial ratio (dividend/price) which indicates how much a company pays in dividends each year. its stock price.

The inverse of the dividend yield is total dividends paid/net income, which is the dividend payout ratio.

The dividend yield is an estimate of the dividend yield only on an equity investment. Assuming dividends do not go up or down, yields should increase as stock prices fall. And conversely, when the stock price goes up, it goes down. Because dividend yields fluctuate relative to stock prices, they can often be unusually high for stocks that are rapidly declining in value.

Newcomers that are relatively small, but continue to grow rapidly, may pay lower average dividends than mature companies in the same industry. In general, mature companies that don’t grow too quickly will pay the highest dividend yield. Consumer staples or non-cyclical utilities are examples of sectors that offer the highest average returns overall.

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While the dividend yields of tech stocks are below average, the same general rule applies to mature stocks.

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