How Much To Invest In Dividend Stocks – There are basically two major categories when it comes to investment styles. The first is investment for capital appreciation. An example of this is buying stocks or other assets in the hope of benefiting from an increase in the price of the asset.

Cash flow invested in dividend stocks. Dividend shares allow you to receive payments from your shares at regular intervals. This can be compared to receiving rental payments from a property you rent. The main difference is that you don’t have to worry about any work to keep your property in good condition.

How Much To Invest In Dividend Stocks

How Much To Invest In Dividend Stocks

In this article, you will learn everything you need to know about how dividend stocks work and how to properly invest in dividend stocks.

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Before we get into how dividend stocks work, it’s important to understand what dividends are in the first place and why they exist. When a company goes public, it receives money from investors in exchange for ownership in the company. These investors are also referred to as stakeholders.

At the end of each year, there are two possible outcomes for the company’s profitability: Either it has generated a profit for the year or it has not. Once a company has managed to generate a surplus of revenue, it must decide what to do with its profits. The two most common options are:

The second option is also known as paying dividends. This means that dividends are basically nothing more than a distribution of a company’s profits to its shareholders.

As a company can choose to pay dividends or not, not all companies pay dividends. In fact, of the roughly 500 large-cap companies in the S&P 500 index, approx. 93 did not pay dividends in 2018.

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Now that you know what dividends are and why they exist, let me present what you need to know to take advantage of dividend payments. The dividend payment process can be divided into four days:

As you can see, it is not possible to buy a stock just before the dividends are paid and then sell it immediately after. You must be a shareholder for a certain period of time to be eligible for dividends. The length of this time frame is usually a few days.

After a company pays out dividends, it is theoretically worth less than before because it is handing over cash (for cash dividends) to its shareholders. This is also one reason why the share price falls on the ex-dividend date.

How Much To Invest In Dividend Stocks

Furthermore, if the price of the stock is not adjusted downwards on the ex-dividend date, it would allow for arbitrage opportunities. This is the case because an investor can buy the stock immediately before the ex-dividend date, sell it immediately after the record date and receive the dividend. At the same time, the investor could cover his long position, so he is (more or less) immune to price fluctuations. This would lead to a gain in the size of the received dividend.

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However, if the stock price falls by the amount of the dividend on the ex-dividend date, the investor would have a loss in the stock position of the size of the dividend, which would offset the profit from the dividend received.

If you frequently sell stocks, it is important to understand that if you are short a stock on the record date, you must pay the dividend! So be sure to check any future dividends before you short a stock.

Cash dividends are by far the most common type of dividend. Moreover, they are the simplest. When a company pays cash dividends, it simply distributes its profits to its shareholders in the form of cash. The amount is usually expressed on a per share basis.

For example, a company could declare a dividend of the size $0.5/share. This would mean that for every share you own in this company, you will receive $0.5.

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Stock dividends are almost as common as cash dividends. Nevertheless, they are not as rare as other dividend types. When a company declares stock dividends, it issues new shares of stock and distributes them to current shareholders. For example, if a company declares a 1% stock dividend, you will receive one additional share for every 100 shares you already own.

The problem with stock dividends is that they lead to dilution, which means that even if you get additional shares of the stock, your total position value does not increase because the stock price goes down. In this sense, stock dividends are essentially miniature stock splits.

Stock dividends are usually used when a company either does not have cash available or does not want to distribute its current cash to its investors (probably for liquidity reasons).

How Much To Invest In Dividend Stocks

In addition to cash and stock dividends, other types of dividends also exist. I won’t cover them though, because it’s very rare for a company to declare any other type of dividend than one of the ones just mentioned.

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The frequency of dividend payments depends on the company and its profitability. In theory, a company could pay out dividends monthly, quarterly, semi-annually, annually or even less frequently.

The most common frequency is quarterly, as companies tend to pay out dividends shortly after their earnings announcement. Typically, companies do not vary their dividend payment frequency much.

Many companies have more than one type of share class. The ‘normal’, most commonly traded shares are referred to as common shares. But some companies also have “special” (usually less liquid) shares that are also known as preferred shares.

When it comes to dividends, preference shareholders often have several advantages over ordinary shareholders. Some of these benefits can be:

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Note that not all companies offer preferred stock and of those that do, not all preferred stock is traded as openly and actively as common stock.

Although it may not be the best thing for a company to do, a company can always pay cash dividends even if it has failed to generate a profit. In this case, the money paid out obviously does not come from the current quarterly profit of the company. Instead, the company can pay its dividends through its retained earnings.

‘Retained Earnings’ is an equity account in which a company puts the profits that have not been paid out as dividends. So even if a company is not profitable in the current quarter, it probably has profit reserves from previous quarters. These can be used to pay cash dividends for the current quarter.

How Much To Invest In Dividend Stocks

However, if a company does not have sufficient profit reserves available, it will not pay out cash dividends.

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As the stock price is adjusted as part of the dividend process, option prices are also affected. Due to the decrease in the ex-dividend date, call options tend to become cheaper and put options more expensive in the days leading up to the ex-dividend date.

Furthermore, the assignment risk for short option positions immediately before an ex-dividend date increases dramatically (especially for short calls). This is the case because many option traders exercise their options immediately before the ex-dividend date so that they can receive the dividend.

Note that, if you have options on a stock that pays dividends, you will not receive the dividends unless you have a long stock position.

In my opinion, examples are one of the best ways to learn how dividend stocks work. Therefore, I now present the whole process from the declaration of dividends to the payment of dividends based on Apple Inc (AAPL) latest dividends of 2018.

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As visible all the way to the left, the dividend type is a cash dividend which means that Apple Inc distributes its profit to its shareholders in the form of cash. The amount of cash is $0.73/share.

Apple Inc declared this dividend on 1/11/2018. Dates for the payment of dividends on 11/8/2018. On this date, the share price of Apple Inc was adjusted downwards by $0.73, the size of the dividend. In addition, you must buy shares of AAPL before this date to receive the $0.73/share in dividends. In addition to that, you must hold your long AAPL position at least until the record date, which was 12/11/2018, four days after the ex-dividend date. Finally, the $0.73/share dividend was paid on 11/15/2018.

As clearly visible on the following AAPL price chart, dividends do not seem to have a significant impact on the price of AAPL. Just like most of the other large cap stocks, AAPL’s price dropped drastically in November 2018.

How Much To Invest In Dividend Stocks

To recap, for every 100 shares of AAPL you owned before 11/8/2018 (ex-date) and held until at least 11/12/2018 (record date), you will receive $73 on 11/15/2018 (pay) date).

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Which stocks to buy for dividends depends highly on your appetite for risk, available capital and investment philosophy. Therefore, I cannot give you personal recommendations of stocks to buy dividends. That being said, I can still give you some general guidelines to follow when buying stocks for dividends.

First, it is important to understand the correlation between dividends and the profitability of the company. If a company is struggling to be profitable, it is not a good investment (for dividends). If you are looking for stocks to buy


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