Basics On Dividends And Investing In Dividend-Friendly Markets

*none of this is financial advice, DYOR before investing in any way. This is my personal investment plan/idea and it doesn’t guarantee gains

Many of you know me as a freelance writer. Now that I’ve finally got my finances in order, I decided it’s time to get down to the business of investing. Trust me, it is a whole business since you need hours upon hours to explore all the different investment options.

Today, I want to talk about dividends and how they work. However, know that this is not investment advice, I’m just stating my views. Let’s start with the basics.

What Are Dividends?

Imagine a super successful company. It’s been around for decades, it earns a solid amount of money each month, and is financially stable. This company has also decided to offer shares to people. Those who bought shares are now the company’s shareholders.

They’re treated as investors, as the company can use their money to further grow the business. This is how shareholders help the company with financial backing. Now, this company decides to reward them — with dividends.

The board of directors will be the ones to decide how many dividends are paid to the shareholders and when. They’ll also decide on the kind of dividends paid. Know there are several types of dividends, and most investors prefer cash.

Stocks vs. Shares vs. Dividends

Another thing to note is that stocks, shares, and dividends aren’t interchangeable terms. Simply said, a dividend is paid per share of stock.

For example, if you decide to purchase 100 shares of our company, those 100 shares would give you ownership over a certain amount of stocks. On the other hand, if you want to purchase 100 stocks, you’ll be buying shares of 100 different companies.

Finding The Right Investment Opportunity

Before you jump into investing in all sorts of shares and stocks, you should check out the balance sheet of the company in question. It often happens that organizations lure in their investors with promises of extremely high dividend yield.

In reality, this means they’ll be pulling money away from their income (which should be used to scale business in some regard) and giving it to shareholders. This can result in larger debt and the company can quickly flop, leaving you with worthless stocks and no dividends to enjoy.

Still, many companies out there are strong enough to manage a high dividend yield. They have solid performance and good cash flow, which allows them to reward their shareholders. In general, you should look for companies that pay 2% to 6% to stay safe and avoid the dividend yield trap.

How To Start Investing In Shares That Pay Dividends?

The first step is to check out Google and see what companies pay dividends. Then, check your country’s laws and regulations regarding taxes and investing in dividend stocks. You’ll probably find all the info on the official website of your government and taxation body.

This info will give you a general idea of how you’ll pay taxes and manage returns. Remember, there are many types of dividends you can receive, but for the sake of this article, we’ll say you’re going with cash.

The next step would be to open an account on the online platform where you can legally invest in shares. This likely differs per country, and you might need to get into the market through an intermediary.

Now that you have access to various industries, check out which ones interest you the most. You can choose between several dividend-friendly industries:

• Utilities
• REITs
• Telecommunications, etc

There are several other industries with companies that pay dividends. At the moment, I’m looking into health care and IT, as those are developing super fast.

You can also find investing opportunities by:

• Reading financial sites
• Opening a brokerage account
• Checking SEC
• Tracking stock exchanges

Now it’s time to decide how much you’ll invest. The golden rule of every investment is to never spend more than you can afford to lose. For some, this is $100, for others, it’s $100,000. The biggest trick in this step is to not compare with other investors. Focus only on your current financial abilities and options.

However, remember that you’ll likely have lower returns if you invest a small amount. Additionally, stay away from debt. Don’t take out loans to invest in any market, no matter how strong the company looks. You never know what can happen so you could lose your job and not be able to repay the loan.

You’re In, Now What?

Now that you’ve decided which company you’ll invest in, it’s time to start tracking your returns. Dividends will likely start accumulating in the next quarter (presumably), and you’ll have to keep track for several reasons, including:

• Taxation purposes
• Tracking returns
• Tracking losses
• Diversifying portfolio

You’ll also have the option to sell or reinvest the cash dividend, which makes portfolio tracking complex. There are several ways to calculate cash dividends, with the cash dividend per share formula being the most used method. The formula goes as follows:

Dividends Per Share = (total dividends paid out over a period — any special dividends) / (shares outstanding)

If you don’t want to deal with formulas, you can use one of many portfolio trackers to stay up to date on the changes in your investments.

To Sum Up

Cash dividends are one of the best ways to achieve passive income. Still, you’ll want to carefully select the company you’ll invest in, to avoid the dividend yield trap. Some of the most stable industries include telecommunications, health care, and REITs. Finally, once you select the right market, check your local laws and tax obligations so you can invest safely.