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Nicholas Cook
Nicholas Cook

How To Buy Dividend Stocks WORK


A dividend stock is a publicly traded company that regularly shares profits with shareholders through dividends. These companies tend to be both consistently profitable and committed to paying dividends for the foreseeable future.




how to buy dividend stocks


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In order to collect dividends on a stock, you simply need to own shares in the company through a brokerage account or a retirement plan such as an IRA. When the dividends are paid, the cash will automatically be deposited into your account.


The Dividend Aristocrats refers to a group of companies from the S&P 500 that have increased dividends per share for at least 25 consecutive years. The S&P 500 Dividend Aristocrats ETF (NOBL) allows investors to easily purchase these companies that have consistently rewarded shareholders.


The list of dividend aristocrats comprises 67 companies (as of February 2023) and includes well-known brands such as Coca-Cola (KO), Walmart (WMT) and International Business Machines (IBM), as well as lesser-known companies like Illinois Tool Works (ITW) and Expeditors International of Washington (EXPD).


This approach will typically include companies that have a history of increasing dividend payments over time. While the yield will likely be lower than funds that focus solely on high payouts, the dividend growers may see more stock price appreciation over the long term based on higher earnings growth rates. Funds focused on dividend growth will often hold companies such as Microsoft, Walmart, Visa or even Apple.


But owning a diversified group of companies through an index fund can be a great way to avoid the risk of picking the wrong company. In the past 50 years, the only meaningful decline in dividends per share of the S&P 500 index came during the financial crisis of 2008 and 2009 when many banks were forced to cut their payouts. Dividends fell about 20 percent during that time frame, but have since surpassed the prior peak by a wide margin.


Rising interest rates: When rates go up, it could also pose a risk to funds and ETFs with high dividend yields. As rates rise, investors who have purchased dividend funds to boost their income may rotate out of high-yield stocks toward bonds or other assets, causing stock prices to fall.


Dividends can have a big impact on your portfolio over time. They can help generate income during retirement or earlier and can also be reinvested to increase your total investment return. Consider owning dividend-paying companies through a low-cost fund or ETF in a tax-advantaged account as part of your long-term investment plan.


Dividends can be a great way to give your investment portfolio a boost of income, which is something many people are looking for during periods of high inflation and amid talk of a possible recession. Dividend stocks or dividend funds can help you earn regular passive income from some of the strongest companies in the economy.


IBM is one of the largest tech companies in the U.S. and earns more than two-thirds of its revenue from software and consulting services. The Armonk, New York-based company has paid a dividend for over 100 consecutive years.


AT&T is another telecommunications leader that generates solid cash flow for shareholders. Recently, the company has divested some assets and cut its dividend by nearly half as it focuses on 5G investments and paying down its heavy debt load.


Walgreens Boots Alliance operates retail pharmacies across the U.S., Europe and Asia. Its U.S. pharmacy business administered about 35 million COVID-19 vaccinations in its 2022 fiscal year. The company has a dividend history that dates back to 1989.


3M manufactures a variety of products that are used by businesses and consumers alike. The St. Paul, Minnesota-based company makes everything from building materials, electronics components and orthodontics to perhaps its best-known product: Scotch tape. 3M has paid a dividend to shareholders without interruption for more than 100 years.


If you're investing through a tax-deferred account, dividends won't impact your tax situation. But if you're investing through a taxable account, these dividend payments will lead to additional taxes for you.


Let's say you buy 100 shares for $5,000. On the day the dividend is paid, the market value of each share drops to $48, leaving your share value at $4,800. But you've earned $200 in dividends, which means you're even. So far, so good?


This is one of the only situations when it might make sense to "time" your investment, and it only applies to large sums of money. If you regularly invest smaller amounts, don't interrupt your usual plan just to avoid a dividend.


A stock's capital-gains potential is influenced significantly by what the market does in a given year. Stocks can buck a downward market, but most don't. On the other hand, dividends are usually paid whether the broad market is up or down.


The dependability of dividends is a big reason to consider dividends when buying stock. For example, Procter & Gamble, the consumer-products giant, has paid a dividend every year since 1891. Procter & Gamble's stock price has not risen every year since 1891, but shareholders who owned the stock at least got paid dividends during those down years.


To understand the concept of payback, look at the following example. Let's say you buy 200 shares of a $40 stock. Your investment is $8,000 and the stock pays an annual dividend of $1.20 per share (that's a yield of 3%). Based on that dividend, you expect to receive $240 in dividends the first year. If that dividend stream never changes, you will recoup your initial $8,000 investment in roughly 33 years. What if that dividend stream grew just 5% per year? You would recoup your initial investment in 20 years. In other words, your payback period would be reduced by some 13 years.


Should you focus on stocks that have the quickest payback? Not necessarily. Ultimately, total return is what matters and if the investment aligns with your objectives and risk constraints. It's great to have a stock pay back your initial investment in just 15 years, but it's better to own a stock that increases your initial investment 5-fold in 15 years. Still, using dividend payback is a worthwhile concept for framing the risk-return potential of 2 stocks. The dividend payback matrix helps determine payback times (in years) based on dividend yields and dividend-growth assumptions.


Dividend-paying stocks provide a way for investors to get paid during rocky market periods, when capital gains are hard to achieve. They may provide some hedge against inflation, especially when they grow over time. They are tax advantaged, when compared to some other forms of income, such as interest on fixed-income investments. Dividend-paying stocks, on average, tend to be less volatile than non-dividend-paying stocks. And a dividend stream, especially when reinvested to take advantage of the power of compounding, can help build wealth over time.


A stock price adjusts downward when a dividend is paid. The adjustment may not be easily observed amidst the daily price fluctuations of a typical stock, but the adjustment does happen. This adjustment is much more obvious when a company pays a "special dividend" (also known as a one-time dividend). When a company pays a special dividend to its shareholders, the stock price is immediately reduced.


This downward adjustment in the stock price takes place on the ex-dividend date. Typically, the ex-dividend date is 1 business day prior to the record date. The ex-dividend date represents the cut-off point for receiving the dividend. You have to own a stock prior to the ex-dividend date in order to receive the next dividend payment. If you buy a stock on or after the ex-dividend date, you are not entitled to the next paid dividend. If this sounds unfair, remember that the stock price adjusts downward to reflect the dividend payment. Therefore, while you are not entitled to the dividend if you buy on or after the ex-dividend date, you are paying a lower price for the shares.


On January 10, 2022, XYZ, Inc. declares a dividend payable to its shareholders on March 1, 2022. XYZ also announces that shareholders of record on the company's books on or before February 8, 2022, are entitled to the dividend. The stock would then go ex-dividend 1 business day before the record date. Those who purchase before the ex-dividend date receive the dividend.


Many investors believe that if they buy on the record date, they are entitled to the dividend. However, stock trades do not "settle" on the day you buy them. The ex-dividend date essentially reflects the settlement period.


Remember that the stock price adjusts for the dividend payment. Suppose that you buy 200 shares of stock at $24 per share on February 6, one day before the ex-dividend date of February 7, and you sell the stock at the close of February 7. The stock pays a quarterly dividend of $0.50 per share. The stock price will adjust downward on February 7 to reflect the $0.50 payment. It's possible that, despite this adjustment, the stock could actually close on February 7 at a higher level. It is also possible that the stock price could close February 7 at a level lower than the $23.50 price suggested by the $0.50 adjustment to reflect the $0.50 dividend.


In this case, the dividend-capture strategy was not a winner. You're out the commissions to buy and sell the shares, you have a realized loss that you may or may not be able to write off immediately (depending on the amount of realized gains and losses you already have), and you lose the preferred 15% tax rate on your dividends because you didn't hold the stock long enough.


Are you looking for a way to grow your investment assets over time, or are you seeking current income? Sometimes you can accomplish both goals with one investment. Dividend stocks are versatile investment securities that can combine long-term growth potential and income from dividends.


Before you decide whether this choice is right for your investment strategy, read on to learn how to invest in dividend stocks, how to identify a good dividend yield, how dividends are taxed and what else you may need to know before buying. 041b061a72


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