How to Make Money from Dividend shares
Every investor invests in the stock market for different purposes. Some believe in aggressive investing and some in conservative investing. Aggressive investment refers to investment selected for their potential to increase the value of an initial cash outlay. It means stocks have the potential for growth as opposed to their ability to provide financial stability. Conservative investing mainly priorities on capital protection over market returns. An investor chooses their portfolio depending upon their investment style. If an investor is a conservative investor, who wants regular incomes and capital protection then dividend stock is best.
A dividend stock mainly distributes a portion of the company’s earnings to investors regularly. They are mainly large-cap companies with a track record of disturbing earnings back to the investor. Buying dividend stocks can be one of the best approaches for investors looking to generate income or those simply looking to build wealth by reinvesting dividend payments. It can also be appealing for investors looking for lower-risk investments, which can often be found in dividend stocks. First, look at some few important terms before investing: –
- Dividends: – This is mainly profits that a company shares with its shareholders as decided by the board of directors.
- Dividend Yield: – It is the ratio of annual dividend per share, divided by the price per share “
In most cases, the company partially distributes and keeps the rest for the other purpose, such as expansion. The dividends are distributed per share.
The working of Dividend Stocks:
When companies make a profit, they spend a large portion of the money into the company’s expansions or on things which could make the company better. However, not all profits will be spent. A portion of their profits is rewarded to their loyal stockholders with a cash payment. The cash payment which is paid to the investor is called a dividend.
For example: Let’s say that Reliance is trading at Rs. 1200 per share. It pays an annual dividend of 2% annually, or Rs24 per share each year. So, every three months, one would find a cash payment of Rs 8 in your brokerage account for each Reliance shares one owns. To maximize the benefit of dividend stocks, an investor needs to buy and hold onto your stock shares for a while. But an investor needs to know some technical terms:
- Declaration Date: It’s the date when the company declares its dividend.
- Date of record: It is mainly the date when a company records, shareholders who are eligible to receive the dividend.
- Ex-date: It is also called the ex-dividend date. This is the cut-off date for being eligible to receive the dividend payment. An investor must purchase the stock before this critical day.
- Pay Date: - This is the day when the dividend is paid.
Basics of Dividend Strategy:
Once a trader is aware of dividend dates, the strategy for capturing a dividend is quite simple. One simple strategy is to purchase the stock before the ex-dividend date and then sell it either on an ex-dividend date or at some point afterward. If the investor-owned the stock on the ex-date, the dividend will be paid automatically. This is the most popular strategy among traders and money managers. It is one of the simplest and best ways to make money in the stock market without much risk.
Let’s look at the advantage of the dividend investment:
- Growth Compounding: One of the benefits of exponential growth is multiplied by growing dividends. The exponential power of dividend growth can provide competitive returns regardless of whether the price of the stock increases in value or not.
- Capital Preservation: Most of the dividend-paying companies are large caps. Large caps are quite stable and mature than the average company. They perform better in bear markets than other speculative stocks.
- Hedge against Inflation: One of the best advantages of investing in dividend stocks is that it provides a hedge against inflation. As compared to the fixed income instrument, they provide better returns.
- Regular Income stream: Dividend provides a regular income stream. In most cases, the dividend is paid quarterly. But a constructed portfolio of dividend stocks can provide a consistent monthly income stream.
*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing