Dividend investing can be a way to secure additional income from your portfolio over and above basic asset appreciation. Here’s how it works.
With uncertainty continuing to dog the market, many investors have fled to quality and channeled their money into stocks which pay a dividend. By doing so they can access an additional revenue stream aside from asset appreciation, but if you want to make the most of it, you need to approach it in the right way.
Certain stocks have always been popular because they paid out a dividend. BP stocks, for example, attracted investors looking to benefit from the lucrative annual dividend it paid to investors. Like other dividend-paying companies, they paid dividends on the basis of net profits, which seemed to be great in the years of plenty but caused something of a shock when profits evaporated after the Gulf of Mexico disaster.
Dividends are normally paid out on the basis of how many shares you own and your dividends per share (DPS). For example, if you have a dividend of £1 and own 100 shares, you’ll receive £100 annually. This tends to be paid quarterly so would amount to £25.
What are the best accounts to invest in dividend stocks
You can compare all the stockbrokers where you can buy stocks that pay dividends or you can read our individual expert and client reviews on the below:
How to invest in dividends and dividend stocks
When choosing a dividend stock, you may decide to choose between high yield and high growth options. A high yield strategy would see you go for companies which are growing slowly but have a high cash flow which allows them to pay health dividends each year. This could secure a good income in the short term.
A high growth strategy on the other hand, could focus on a company which may have relatively small dividends but is growing rapidly. Your hope will be that, within a few years, the size of these dividends will overtake the higher yield company.
In an uncertain world, this can often feel like a good safe option. These stocks can have lower volatility and offer more revenue. Even so, as the experience of BP shows, even the most reliable looking stock can suffer a shock.
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Tom Cropper is a financial journalist with work which has appeared in titles such as the Guardian, Euromoney and many others.