If you’re interested in investing outside of bonds, stock dividends are a common option for income-oriented investors. Before you take the next step, it’s important to understand what stock dividends are and how they can impact you as an investor. Learn more about this type of investment, its benefits and disadvantages, and how to start the investment process.
What Are Stock Dividends?
Stock dividends are a corporation’s profit distributions made to shareholders via additional company shares as opposed to cash. Though they dilute the share price, they’re a great way to reward shareholders without costing a company too much.
To give you an idea of how they’re distributed, if the stock dividend is 10%, 0.10 shares must be distributed for every share that shareholders currently own. If a shareholder owns 100, this would mean they’d get an additional 10.
Consider investing in stock dividends only after you’ve evaluated the pros and cons.
Benefits and Disadvantages of Investing
Before you decide whether or not you want to invest in stock dividends, it’s important to understand the benefits and drawbacks. This can help you make a more informed decision as an investor. Here are the benefits of investing in stock dividends:
- Steady income.
- Dividend reinvestment.
- Capital appreciation.
While this investment method poses several benefits, understanding its disadvantages can also help you decide if this is the right investment strategy for you. Here are the disadvantages of investing in stock dividends:
- Higher risk compared to investing in bonds.
- Diluted earnings per share.
- Double taxation.
- Potential dividend reduction.
What Is a Dividend Yield?
The dividend yield is a ratio that shows how much a company distributes in dividends to its shareholders per year in relation to its stock price. In mathematical terms, it’s the dividend per share divided by the price per share, expressed as a percentage.
Understanding this ratio can help you evaluate a company’s financial health and stability. If a company pays a dividend consistently, it can show that it’s profitable enough to continue doing this. If a company starts to pay a dividend because it sees no other uses for its cash, it may indicate fewer opportunities for growth, like an expansion or an acquisition.
How to Invest
If you’ve decided to take the next step and invest in stock dividends, you need to know how to do it successfully. To invest in stock dividends, you can purchase individual stocks or go through exchange-traded funds (ETF).
Here are the steps for investing in stock dividends individually:
- Research dividend-paying stocks.
- Compare the dividend yields and the stock’s payout ratio.
- Analyze the company’s industry and finances.
- Determine the amount of stock you want to buy.
- Purchase the stock.
Follow these simple steps for investing in ETF:
- Open a brokerage account.
- Find ETFs, and compare costs.
- Create a diversified ETF portfolio.
- Buy the ETF.
Now that you know what a stock dividend entails, it’s easier to determine if this is a fruitful choice for you. Ultimately, it’s important that the pros outweigh the cons as an investor.