A dividend stock is an ownership share of the shareholder in a particular company which pays a portion of the profits while systematically creating a stream of income. Based on the payout ratio of the company, the dividend is given to the shareholders. For example: If a company has a payout ratio of 50%. It means that it will be distributing 50% of its retained earnings to its shareholders and the remaining 50% will be used in clearing its short-term obligations, further investments of the company and launching a new product.
The company tries to compensate both its common shareholders and the preferred shareholders, where the priority is given to the preferred shareholders.
Procedure to buy dividend stock:
There is no difference in buying a stock and buying a dividend stock. You only need to open a brokerage account with an online broker and fund the account. Secondly, you need to identify the list of companies that pay a dividend, and they maintain consistency in paying a dividend. Once open a brokerage account, the broker associated with these accounts provide tools to identify a list of dividend-paying stocks.
The advantage of buying a dividend stock:
People prefer to have a dividend stock in their portfolio as it possesses the feature of compounding. Compounding means that the earning which is generated through these dividend stock will get reinvested and will eventually create earnings from earning. More precisely, the dividend generated from these dividend stock will get reinvested to buy another set of a share of the dividend stock which results in giving a higher dividend.
Points to remember while investing in dividend stock:
There are three important points that one should keep in mind before investing in dividend stock:
Firstly, one should check the historical background/data of the dividend stock. By historical background, it means that the investor needs to have an idea that the stock is giving dividend regularly and its dividend increases yearly. Once the list of these dividend stock is available, one can easily shortlist those stocks who awarded a regular dividend at an increasing rate annually. It depends on the investors who shortlist these dividend stock to select the number of years to get the historical data of these stocks.
Secondly, shortlisting of these dividend stock depends on how these stock will keep up with the inflation. It is very well known that increased inflation reduces the buying power of your income. Even in such a situation, if the dividend stock grows as per its historical rate of inflation growth, then investor much go for that stock.
Thirdly, the investor should look for those dividend stocks which gives relative yield. Opting dividend stocks with higher yield will generate a high dividend, but at the same time, a significant risk also gets associated with these stocks in case of a dividend cut. In such a situation, these high yielding stock may result in a sudden fall in the dividend in case the company declares no dividend.
Summarizing the entire three tips, investors shortlisting the dividend stock should shortlist the dividend stock in such a manner that their portfolio consists of a mixture of those stock with consistency in giving a dividend, with a relative yield and at par with the inflation rate to generate a better income from these stocks.
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