Why Investors Love Dividends (And Why They Can Be Dangerous)

John D. Rockefeller, the first billionaire in history, was once quoted as saying that his only pleasure in life was C

dividends

. Clearly people

love

their

dividends

and rightly so, after all, some sources claim that for 20 Years dividends make up 60% of the SP500, although it threw up a big number that will explain our dangers. Keep in mind the things that could quickly turn a great dividend stock into a flop, so before we go hunting for dividends, let's review the good, the bad and the ugly in today's simple bagel. Capital appreciation gets all the

love

. When it comes to investing success stories, think about all the times you've heard of someone buying an investment for a few dollars only to sell it for millions later, but it's not the only component of their total return, after everything, if you are an owner.

Give it in paint stocks, part of your profits will come from the income you receive and there are many in the investment community who live for that extra cash flow. In fact, it's quite common to find

investors

who dedicate their entire portfolio to dividend-paying stocks and can Blame Them: Dividends are like an adult's allowance with lots of benefits, and unlike a stock price, the return

they

offer is a little more stable. Keep in mind that following a dividend investing strategy is not as easy as chasing the highest yields, there is a lot to do. Learn before choosing a dividend stock and what may seem like an incredible source of cash may actually be a ticking time bomb in disguise, so today let's take a full look at dividends, including who pays them, why people love them so much and what you should take into account. because when you hunt them, theoretically, a company pays a dividend when it believes it cannot earn an adequate return by reinvesting the money in its operations.

This is why larger, more mature companies make blue-chip companies tend to pay dividends. Gold Younger, faster-growing companies prefer to reinvest their profits, but it's not just the age of the company that affects whether it will pay a dividend, the company or industry in which it operates also plays a role. Some companies are simply better prepared to pay dividends than others, such as regulated utilities. Companies tend to have long-term customer contracts with governments to supply electricity to municipalities, making their cash flows fairly consistent and predictable, and expansion projects often take a while to pass the necessary regulation. .

Internet companies, on the other hand, operate in a rapidly and continually expanding environment. changing an environment with some barriers to growth Due to these differences, utilities are more likely to pay a higher dividend given their stable operations, so knowing who has dividends is fairly straightforward, but it may not be obvious from immediately why people love them so much. After all, if companies can achieve capital appreciation while maintaining their profits, does it really matter if we receive our return through a dividend? Well, for some, receiving a dividend is simply useful, for example, dividends are great for income investing or for people who need to withdraw from their holdings over time, after all, if you have a steady flow of cash By logging into your account you only need to sell any of your investments to meet your withdrawal needs, this means you can avoid transaction fees as well as the effect of market fluctuations on your income.

To mention that in Canada and the US most dividends are qualified or eligible, we mean

they

actually receive preferential tax treatment, lower interest payments from bonds, another popular income investment, although worth Note that this benefit is for actions in your own country. Another reason for the dividend fanatic has to do with your risk tolerance. tend to value certain returns over uncertain returns, a company may promise to make you money if they maintain their profits, many

investors

would prefer to receive a payment instead, people also tend to believe that companies that pay dividends are more disciplined and conservative, which which makes them more attractive.

For investors looking for a sense of security, possibly the most important reason investors love dividends is the snowball effect they provide. A common strategy with dividend stocks is to take the income received and use it to buy more shares of the company while the effects are slow at first if you carry out the strategy over a long period of time as your money begins to earn itself, Don't believe me, let's look at an example. Imagine you have 20 shares worth $20 each and each pay an annual dividend of $1. so with a 5% return in year 1 we get a total dividend of 20 dollars and once you know it at the current stock price you can buy the 21st stock in the future this means you will receive 21 dollars in instead of 20, but if every year you invest your money in buying more shares, you will end up with higher dividends, which means you can increase the number of shares you buy each time and if you continue this at the end of 10 years, you will have around 33. cumulative panyu shares 33 dollars a year is a perfect cycle buying more shares equals more dividends which generates more shares and you get the point, but it gets even better with this example, we are earning 5% per year year simply by reinvesting our fixed dividends, what dividends.

They are not always fixed if the company you have invested in is actually growing you may see its dividend increase after all if the company makes more money each year shareholders should see a larger earnings payout so If we take into account a 5% dividend growth rate for year 10 we will get just under $60 a year and the rate at which the amount is growing is accelerating that is why people love dividends without any change in the share price your world essentially multiplies your dividends you are buying more shares those additional The shares are generating you more dividends to expand the purchase while the amount you are paid per share increases.

We let this play out over a period of time. We can see that it works very well in your favor, not to mention that if the share price goes up, you will have more shares to profit from in case you are not happy enough with those results. Some stocks offer something called a dividend or drip reinvestment plan which allows you to automatically put your dividends into new shares free of charge with some drips even allowing you to buy shares at a discount to the market price, so if you were worried about fees transaction or effort, now you can make all of this happen without any involvement on your part, it's a pretty powerful combination of mechanisms working in your favor and if that's so, what's the return on 5%?

Imagine what we can achieve if we buy stocks with a 10% yield. Well, this is where we run into a dividend brake. You see, you are right to think that a company with a higher yield will earn you a better return. After all, a better yield is equal to a stock's dividend divided by its price, so if we buy a stock with a 10% yield , it means we will earn 10% from dividends alone, but unfortunately high-yielding companies can be very

dangerous

for investors. risk when looking only at the performance of a stock, while high performance means high performance initially, it can also mean that your stock has taken a hit on your total return, why remember that there are two components to performance and the most Quick to rise is not for the dividend to increase but for the price to fall, the price of a stock could fall when investors worry about the company's operations, so a high-yield company may simply be a company that has had some problems and its share price has taken a hit as a result, so what you may be asking, am I still getting a 10% return, well that's the thing, if a company is in trouble, it can be forced to cut its dividend to save money, just as you bought the stock to get that sweet payout.

We're now facing less attractive earnings and there's a double whammy here: the markets don't like it when companies cut their dividends, so not only will this hurt your dividend inflow, but you can bet the share price will stock will take another hit and take General Electric for example, whose shares fell 12 percent when they announced they would cut their dividend in November 2017, so while investing in dividends, the Sox can be a huge wealth generator , chasing high yields can be a

dangerous

play, instead a better approach is to buy solid companies with a resilient dividend. Historical dividend policy information can be found online so you can check how consistent a company has been with its dividends and if they are growing, and to check payout sustainability you should analyze a company's payout ratio, This shows how much of a company's earnings are paid out to investors, and if they increase over time, it may indicate that a company is struggling to meet its dividend payments.

For investors with income needs, dividend-only strategies can be useful, but there's more to it than just high rates of return. All in all, if you're going to make your holdings pay you, you need to make sure they can afford it, and with that being said, we're out of time. If you like this video, hit the like button and you'll feel like we're doing it here. subscribe, it's a little bottle icon to make sure you get notified about future videos. If you have any comments or topics you would like us to cover in future videos, please leave a comment below for the play Magel, my name is Richard Coffin.

Thanks for joining. me today