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How Much Do Dividend Stocks Pay? A Definite Guide-2021

As you aging and approaching retirement, you want to secure your future and need a sufficient amount of money to meet your old-age expenses. You may be exploring all sources of income like Dividend Income. But how much do dividend stocks pay?   

You want financial freedom. Because you need money to cover the expenses due to the increased cost of living. And also you need money for medical expenses, expenses for nutritious foods, and so on. Maybe you get that money from your retirement benefits and any other source of income that come to your rescue.

But what if don’t have income from any of the above sources? If you have some investment money, you can generate a solid income source. That’s Dividend Income. But you’re unable to figure out how much dividend stocks pay and how can invest in dividend stocks. I will walk through all in this guide. Stay tuned.  

Table of Contents

Dividend Stock Meaning

Life is all about balance and investing can’t be an exception to this rule. Being prudent stock investors, we know that the stock prices move in a zigzag way. Here you’ll find that the financial data or performance of the company does not influence the movement of stock prices, at least on a short-term basis.

For retail investors like you, it’s not advisable to enter the stock market without doing proper research. Maybe you’re following the herd and do what the majority of investors do. Even if you somehow time the market and succeed in judge the market trend, you still may lose your entire gains by doing some silly mistakes. This happens oftentimes.

But if you pick a fundamentally good stock, it can give you a stunning return in the short-to-medium term. In addition to that, you can earn a dividend, an equivalent portion of the profits sharing of the company. You don’t have to worry whether the stock price falls or rises.

Dividend Stocks Benefits

You will remain the peace of mind and receive some extra cash, called Stocks Dividend Payout at the end of the year. How much do dividend stocks pay is dependent upon many inherent factors, which I will discuss throughout my post. 

Furthermore, dividend payouts of stock are still fully tax-free in some countries. Wait, that’s not all. The dividend payout of good companies grows proportionally with the growth in the net profit. Additionally, your stock dividend income will likely grow each year in a compounded fashion if you stay longer.

Well, if you have enough seed money, you can buy dividend-paying stocks. They can shed the effect of inflation and keep pace with the rising cost of living. A basket of stocks representing major indices could produce a growing stream of income.    

Some evergreen industries, banks, and insurance companies are perhaps good for this. If such companies or stocks gradually increase the dividend payout over time, you’re the solid winner. You need not worry about what their stock prices are.

How Does Stock Dividend Work?

A dividend is a payment that shareholders received when a company is profitable. The company may reinvest profits for the growth of the business or may distribute a part of the profits to shareholders as dividends.

Dividends comprise several forms. The most common is cash dividend which usually is paid into the investment account of shareholders. For example, if a company declares a 20-cent dividend and you own 100 shares you’ll receive $20. Usually, well-managed companies with robust free cash flows are more likely to pay dividends. However, it varies according to management decisions of how much do dividend stocks actually pay.

A lot of investors view dividend-paying companies as a positive gesture for future earnings. Companies may pay dividends quarterly, half-yearly, or annually. Even many real estate companies pay a monthly dividend. But always keep in mind that companies may not give you a guarantee to pay a dividend. And eventually, the company can reduce or stop paying it at any time.

Dividend Stock Ex-Date Vs Record Date

A company that gives regular dividends is assumed to be a financially sound company. Before this, you need to know the record date and the ex-date.

Record Date:

If you hold shares in a dividend-paying company on a particular date, you are eligible for dividend payouts. You should also be aware that simply owning stock on the day of dividend payment doesn’t call for you will receive dividends. For this, you need to be a shareholder earlier which is termed as record date.

Ex-Dividend Date:

For ensuring accurate allocation of dividends, the regulator has set a cut-off period before the record date. This is usually one day before the record date. This cut-off date is called the Ex-dividend date. If you buy dividend stocks on or after the ex-dividend date, you’re not eligible for the juicy dividend.

If you want to pick a dividend, the important thing to remember is that you officially need to buy the stocks at least a few days before the record date. For the eligibility criteria to receive the dividend, you need to check the number of days between the record date and the day of the dividend payout. It varies from company to company. It’s often between one and six weeks.

Dividend Reinvestment Plan

Instead of receiving cash dividends, you can also go for an auto dividend reinvestment plan or drip. With drip, you’re automatically eligible to purchase additional shares with your dividends. This allows investors to accumulate more shares over time. And it could potentially give you compound returns. The rate of compound interest is dependent on how much dividend stocks pay the return.

But it also increases portfolio risk. Generous investors are very selective in this matter. That’s why they invest in dividend-paying stocks. Dividend stock payouts usually provide income and can also boost the overall returns of a portfolio. You can easily calculate the percentage return from dividend income using dividend yield.

How Much Do Dividend Stocks Pay?

You can simply figure out dividend stock payouts by just looking at the Dividend Yield. This is not at all rocket science. Dividend Yield (DY) is the percent return paid over one year for dividend stocks. The yield is the sum of the lasts quarterly dividends divided by the price of the stock and then multiplied by 100. The dividend yield is simply the ratio of dividends paid per share to its current market price. You can easily calculate it online.

So, Dividend Yield= Cash Dividend per share/ Market price of share*100

Let’s say a $30 dividend-paying stock over the past four quarters pay dividends totaling 78 cents per share. This means the stock has a dividend yield of 2.6 percent. Dividend yield essentially indicates how much return you’ll get for the price of the stock.  It also lets you compare stock dividend payouts with other interest-bearing securities like CDs or bonds.

For example, if you decide to purchase a bond yielding 1.5 percent or a stock with a dividend yield of 2.6 percent, you may preferably choose the latter. In addition to the higher yield, many investors also look for consistent and growing dividends.

The increased dividend is a healthy sign. It also indicates that the company is likely to pay future dividends also.  Even though dividend stocks enjoy many benefits, they also possess some inherent risks.

Dividend payouts of stocks are at risk due to changes in interest rates in a rising interest rate era. Maybe after selling dividend stocks, investors may put their money into other higher-yielding and higher return securities. However, no company can give a guarantee that it will give you dividends year after year at the same rate.

Companies that keep paying a higher rate of dividends may not be able to sustain it going forward. With the cut in dividends, the stock price might stumble. Despite inherent risks, dividend-paying stocks tend to provide a good source of income for long-term investors. In addition to that, you could still cash out the stock price appreciation of dividend-paying stocks. 

A 4-6 percent is quite good depending on interest rates and general market conditions. Something less than that may not enough for you to buy a dividend-paying stock.

How to Calculate Dividend Payout Ratio

It is the percentage of net income distributed as dividends to shareholders. It is not wise to invest in a company whose dividend payout ratio is more than 100%. This is because the business can become unsustainable in the long run.

For instance, if the dividend payout grows 20% each year, in 10 years your dividend income could increase by more than six times. And in 20 years it can go up by nearly 40 times. And if you’re able to get the occasional windfalls like a bonus or right issue, your dividend income can go up geometrically in the long run.

For example, if you invest $10,000 in a stock with a dividend yield say 2%, your dividend income will be $200 in the first year. A low bet, right? If the dividend payout grows at 20%, in 20 years your annual dividend income will be $8000 every year. Your share capital will also keep on cherishing every year. So, dividend payout could be your long-term cash cow.

Good Dividend Payout Ratio

Its five-year average return on capital employed (RoCE) needs to be at least 15% for a good dividend-paying company. And its five-year average debt-to-equity (D/E) ratio should not be greater than 1.5.

The ratio of cash flow from operations to cash profit in the past five years should not be less than 60%. And also, the company’s net sales, operating profit, and dividend payout must have a CAGR of 15% in the past five years.

5 Important Features of a Good Dividend Stock

Decreasing the Number of Outstanding Shares: It is beneficial for dividend investors. Warren Buffett always looks for it. Great companies can buy back their stocks with the free cash flow they generate. They usually do stock buy-back when the stock’s price falls below its intrinsic value. Buyback makes each share more valuable and helps to increase the EPS.    

Increasing Earning per Share (EPS): Increasing EPS indicates that the company is doing well. It allows the company to ensure seamless growth and provides competitive advantages. An increase in the EPS is what a great company always looks for.

High Return on Equity (ROE): High ROE of a company specifies that it has some sort of MOAT. It usually indicates its efficiency. It signifies how well the management is doing by utilizing its free cash flow to generate even more returns.

ROE is the Net Income of a company divided by its Equity. Equity is the assets minus the liability of the company. A good ROE is comparable with similar industries. It should increase each year and at least be stable over the 5-10 years.  

Good Dividend Growth History: It stipulates that the company is doing something right. However past dividend history may not guarantees dividends in the future. But the chance of getting a higher dividend is bright.

Sustainable Dividend Payout Ratio: It is perhaps one of the most important traits of a good dividend stock. Because dividend is usually distributed from the free cash flow of the company.

But too much payout of dividends might dwindle the company into crisis. Ideally, it should not be more than 60%. Above this could be a danger sign. There should be a balance between the amount of free cash and the amount of money to distribute to the shareholders.

Dividend stocks may be the best investment option for you. Here are seven reasons why you prefer them.

  • Dividend stocks can offer a good overall return. This overall return includes price appreciation plus dividends. What does that mean? This is a juicy win-win situation for you. If the stocks appreciate, you can offload some stocks after pocketing the dividend payout. At the same time get the benefit of price appreciation. And you can still get the future dividend for the remaining stocks.   
  • Dividend income is moderately taxed. It ranges from 10-15% around the globe. The tax rate is minimal as compared to the income you get from other stock investments. 
  • Dividend-paying companies are usually good and well-established. Many of them rarely cut their dividend payout. Instead, they oftentimes raise them. You may surprise to know that dividend yield is oftentimes the bank interest rate. Then why should you park your money in banks?
  • Getting dividends, you need not sell the stocks that you hold. The dividend payout simply sends to your bank account. Do whatever you want to do with that money.
  • The dividend is not like bonds where bonds are locked investments. With a bond, you get back the original investment with coupon payment at the end of maturity. The total investment you get back may come with less purchasing power at that time. In the case of dividends, your principal amount can increase over time as long as it remains invested in stocks. Stocks are historically the only asset class that can outpace inflation.
  • Dividend yields of the best stocks can rise over time. This never happens in the case of a bond. Stocks in the S&P 500 have continuously been increasing their annual dividends by 17% on an average over the last three years, as per the Morningstar report.
  • You need not do anything for receiving dividends. Just sit back and get the residual income year after year. Here the key point is that your invested dollars are not confined inside the ownership of the stock’s share. If you are young and just started, you can re-invest the dividend you just received. Thus you can be on the path of wealth creation faster due to the effect of “magical compounding”.

The Final Takeaway

Dividend stocks can reward you immensely to meet your old-age expenses. For that, you need to pick good dividend-paying stocks. Stocks that can give you a stunning return in the short-to-medium term. One of the key points you need to check out. Good dividend-paying companies grow proportionally with the growth in their net profit. This is how dividend stocks pay rewards.

If you stay invested longer your stock dividend income will likely grow each year in a compounded fashion. You also check your tax implication. For finding good dividend stocks, you need to go through their dividend-paying history. Just Google and find details from reliable websites like Yahoo Finance, Forbes, and so on.

Important FAQs

How Long Do You Have to Hold a Stock to Get the Dividend?

If you buy a stock the day before the ex-dividend date, you’re entitled to get the dividend. In a nutshell, you need to own a stock for at least two/three business days to get a dividend payout. This is an ordinary dividend. But any drop in share price could be detrimental to any benefit you gained.

Moreover, the taxation rate for short-term capital gain can also make things worse.  Whenever you hold your stock for more than 60 days, the ordinary dividend could generate a qualified dividend. With a long-term investment, you might receive dividend income at a more favorable tax rate.

How Are Stock Dividends Paid? How Much Do Dividend Stocks Pay?

Stock dividend payouts are simply the distribution of some of the company’s net profit among its qualified shareholders. The standard practice for the payment of dividends is available directly to your bank account.  That you will get after the ex-dividend date.

The other alternative method of dividend payouts is allowed by offering you additional shares. This method is known as a dividend reinvestment plan (DRIP). Dividends are usually considered taxable income. 

Can You Lose Money on Dividend Stocks?

Yes, you can. With dividend-paying stocks, you can still lose money. First, you lose money if the stock price drops in value. It happens usually after the ex-dividend date. Even in the event of bad earnings results, the stock price could cascade. You could lose money too with your other stocks regardless of whether they pay dividends or not.

Can You Get Rich Off of Dividends or Live Off Dividend?

The more you invest in dividend stocks, the more you can generate dividend income. As you continue investing, your dividend income over the years will start skyrocketing with a snowball effect. If you reinvest the dividend payouts again and again by buying more stocks, you will be able to compile a huge quantity of quality stocks in your portfolio.

Even if you chose to cash out your dividend payout, it will still supplement your social security. And can generate pension-like retirement income. Of course, you still have to pay capital gain taxes.    

Are Dividends Taxed if Reinvested?

In simple terms, dividend incomes you receive from stocks or mutual funds are taxable. You can redeem dividends into cash. In that case, you’re responsible to pay taxes as per the existing income tax rules of your country.

However, qualified dividends enjoy the benefit of lower dividend tax rates due to long-term capital gains.  The dividend payouts from some municipal funds are still tax-free. You just Google and get them.   

But if you’re planning to reinvest it, you don’t have to pay taxes. This is because dividend payouts are not transferred to your cash account. If you want to avoid taxes on dividends, you can put your dividend-earning shares in a retirement account.

Why is Dividend Investing Bad?

The main cause of concern with dividend investing is that it is taxable. Even if you hold your dividend-paying stocks for more than one year, you still have to pay taxes each year.  This can indeed lower your investment returns. The question is how much should dividend stocks pay?

Usually, most dividend-paying companies are financially stable. Thus dividend stock investing is relatively safe. But those companies are not legally obliged to pay dividends anyway. If they struggle financially, the dividend payout may be at risk.

However, the dividend income is a great way to generate consistent income that can make you rich. But the key cause of concern for you is that dividend-paying stocks are oftentimes seeing less price appreciation than growth stocks.

Should I Buy Dividend Stocks?

Dividend-paying stocks help investors to get paid during a bear market. Even when capital gains are difficult to achieve, dividend stocks render a solid hedge against inflation at their growth phase. They have an explicit tax advantage over other forms of income.

Do Stocks Always Drop Ex-dividend Date?

The stock price usually drops on or after the ex-dividend date. However, after the announcement of a stock dividend, the stock price often shoots up. Whenever dividends are paid out, the number of shares outstanding would increase. However, the value of the company does not change. It just dilutes the book value of a share, and the stock price is adjusted suitably.

Do Warren Buffett Reinvest Dividends?

Did you know that the veteran investor Warren Buffett made $560,000,000 in dividends from Coca-Cola alone just doing nothing? Though Warren Buffett likes to receive dividends, he prefers to reinvest them.

His holdings company Berkshire Hathaway likes to retain dividends. It rather prefers to reinvest its entire earnings for growth. Despite that, nearly half of Berkshire’s holdings pay dividends, and many of them generate dividend yields of 4% or higher.

Is Dividend Paid on Face Value or Market Value?

The dividend payout is always based on the face value (FV) of a stock whatever its present market value. And dividend yield or the annual rate of dividend is exhibited as a percentage basis of the face value of a share.

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