Why are dividend stocks a good investment

Summary

• People typically invest in shares to capitalise on inflation-beating return
• Dividends, alongside capital appreciation in stock makes the total return so attractive
• It’s up to the investors to go for dividend stocks or the shares that have higher returns
• But, one thing is for sure, regular dividends can effectively contribute in making a sizable retirement fund

Investment into stocks comes with a definite risk as all the issued shares are largely guided by the underlying fundamentals of the company they are representing. There’s always a technical pattern involved in the daily trades, irrespective of the ongoing commercial operations.

What drives the share price mostly?

The core business of an enterprise, profitability metrics, ability of the enterprise to service the debt payments, oblige the interest payments on various fixed-income securities issued against the it, the diversity of sources that are generating revenue for the firm, the potential exposure to the long-term, as well as short-term risks, the efficiency of competitors, the market share of the business and ultimately the management’s capability to run the operations are some of the key factors that remain responsible for steering a worthwhile change in the indicative market price of a share.

Why do people invest in shares?

People often turn their inclination towards stocks and other market-tradable assets to capitalise on the higher returns. The shares that comfortably beat the return on investment from safe haven assets, currencies, money market instruments, the company-serviced commercial papers or the government-backed bonds over a long stretch of time are typically preferred by the investors.

Everybody wants a benchmark-beating return on their investment, and for that, there is a large section of market participants who are quite willing to absorb a certain amount of risk.

Also Read | What Is the Lowest Risk Investment in the UK?

Almost all the retail investors only look around the capital appreciation the stock has delivered, over the course of the last six months, a year, or may five.

But, most of them often skips to undermine the real potential of a company, including the dividend it has distributed amidst the eligible investors, the various lucrative buying opportunities and other considerable positions through which a sizable amount of money could be made by parking the money in derivative instruments.

The dividends

Dividends are simply the cherry on the cake, as an investor you would be entitled to receive a wholesome amount, whenever you’re eligible to get the announced dividend. Interestingly, it is over the top of the capital appreciation, the notional gain the stock has delivered over a period of time. No matter, the dividends are taxable in some or the other form.

But, they can ensure a periodic stream of income an individual could look for. Believe it or not, there is a large section of billionaire individuals who don’t receive or draw any salary from their organisations, except for a hold on a sizable equity stake.

In return, what they get is the wholesome corpus when the corporation announces a dividend, be it interim or final. Individuals often slice and dice the company’s data to look for the enterprises that have a high dividend yield as compared to other shares.

Also Read | What are the 5 main reasons for investing in FTSE 100 shares?

Let’s take a look

For instance, a person holds a 15% stake in an enterprise with an issued capital totalling GBP500 billion with the share trading at 500 pence. At the annual general meeting (AGM), the company announces a dividend of 60 pence per share, which translates into a dividend yield of 12%.

At the aforementioned stated stake in equity, the person holds 1 billion shares in the company. At which, the total of declared dividend becomes GBP 600 million in a year. This is only the dividend income. There can be investors who have a little less equity stake, it may be 0.15%, subsequent to which they are qualified to receive a dividend payment of GBP 6 million, that’s also quite impressive.

And on top of it, if the stock you are holding has generated a nominal return of let’s say 15%, then the whole return on investment with a single stock can be imagined. Seems like a very lucrative bet. There are companies which offer regular dividends, some may be twice a year, while there are a few that remain quiet when it comes to declaring dividends.

There are a bunch of stocks listed on the London Stock Exchange that offer dividend payments on a regular basis. There are some companies that haven’t stopped issuing dividends during the Covid-19 storm, effectively keeping up the interest of invested market participants, as well as the people who haven’t invested in the company in their lifetime. It gives a picturesque reflection, a well-advised campaign amidst the investors’ arena.