Investing in stocks with dividends

It is the dividend that allows the shareholder to gradually return the invested capital and legally receive part of the company’s profits. Let us remind you about a special class of marketable assets and how to choose which stocks to invest in for dividends.

The dividend payment scheme for investments in shares of a company (or fund) is an integral part of the development strategy and, as a rule, is strictly spelled out in the Charter. Depending on the strategy, the resulting profit can:

  • Be paid in full as a dividend (in proportion to the number of shares held);
  • The dividend is paid in part, and part is reinvested (as, for example, in the Coca-Cola company);
  • All are reinvested in business development.

If a deferral is assumed for the payment of dividends, then each shareholder has an asset in his investment portfolio, the value of which is constantly growing. They can not only speculate, but also receive regular profits without additional efforts.

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What is Stock Dividend Yield?

Investors when choosing assets and analytics when evaluating stocks work with the following parameters:

  • DPS Dividend per share) is a dividend per one (common or preferred) share in monetary terms.
  • DPR (Dividend payout ratio) – the share of net profit, which is used to pay dividends on shares.
  • Dividend Yield (DY) or dividend yield is the income from the payment of dividends (in% during the holding period) per unit of investment per share.

The dividend yield of a share is calculated using the formula: the ratio of the annual dividend per share to the share price, multiplied by 100%. Please note that if you decide to invest in shares, then you will receive the right to dividend yield one day after their purchase. Although there is a “payment date” for dividends, only those investors who will be included in the register of shareholders at the time of payment (date of record) will receive money. That is, if you bought shares on this day or the day before, then most likely you will not have time to get into the register, since this usually takes 1-3 days.

What are dividends and how do they work?

Dividend Investing in Stocks: A Strategy

This investment technique involves the reinvestment of the dividends received from existing securities into the purchase of additional shares, and on an ongoing basis. Sometimes shares of other companies in the same industry are bought, in which case the reinvested capital protects your portfolio if the value of the company changes to your disadvantage. Dividend strategies are generally focused on preferred shares, but they can be unavailable for a number of reasons. You can buy ordinary shares for the initial investment.

When choosing assets for a dividend strategy, you need to decide how the purchase will be made: directly from the company or through a broker. For example, in the USA there is an investment program Dividend ReInvestment Plans, the essence of which is that according to the broker/investor agreement, the broker is obliged to automatically spend the received dividends on the purchase of additional shares of the company, and at a price significantly lower than the market price.

Large companies, especially American giants, prefer to work directly with clients using the DSPP system, according to this scheme, the corporation will automatically buy shares for you, both upon the initial purchase and upon reinvestment.

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How to find the best stocks to invest in?

Today, only 10-12% of companies from the S & P500 list have the right to be called a “dividend aristocrat”. When choosing investments in stocks, you cannot rely only on profitability, there are several main criteria and each of them is important. A higher dividend yield, all other things being equal, is certainly preferable, but if the yield on a stock is high enough (say, 2% or higher), then additional factors need to be analyzed to make the choice. For example:

1. High liquidity

You need to be able to buy/sell shares on the derivatives market at any time.

2. Issuer reputation

We select companies with legal and “transparent” businesses that meet the disclosure requirements.

3. Stability of dividends

History and payout percentage: high but irregular payouts cause impulse growth and an equally sharp drop in the stock price. Although if the company’s charter provides for “one-time payments” or special dividends, then active speculation on this fact usually does not happen.

4. Positive financial performance

Total return; growth in the value of shares; growth in earnings per share; price to earnings per share ratio; the level of debt load (debt/EBITDA – from 0 to 3); own reinvestment programs.

5. Completeness, availability and reliability of information for analysis

As you can imagine, newcomers, short-term speculators and “potential” bankrupts do not pay dividends. Funds and corporations offering dividend stocks feel much more confident in the market, their securities are less volatile, but they are better able to withstand recessions and market falls.

Investments in stocks with dividends should have prospects for at least 2-3 years. The stability of the dividend strategy presupposes a high degree of confidence in the issuer; it is recommended to choose several companies that pay small but stable dividends over several years. Any problems of the company are immediately reflected in the value of the stock – the more diverse your set of securities, the more relaxed your capital will feel.

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How to start investing Stocks?

With a reasonable approach, investments in foreign stocks can be made an excellent way of earning money – more stable than Forex and more profitable than a regular bank deposit. Consider the available options on how to become shareholders of such giants as Google, Facebook, Amazon and make money on the dynamics of their course.

Today, in order to invest in the shares of American companies, there are three completely legal schemes. Of course, you need to carefully study the legal framework for such operations (in particular, whether personal licenses of the National Bank are needed), but in general they differ only in the level of risk and the minimum amount to enter the market.

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1. Investing in American stocks through national exchanges

To access such an exchange (for example, the Russian SPB or the Ukrainian Stock Exchange), we also open a trading account with a national broker. How is it beneficial?

  • We get access to both local and foreign assets at the same time, in one terminal. For example, almost 500 assets from the S & P500 index are traded on the St. Petersburg Stock Exchange, and the UFB offers more than 300 American shares.
  • Investments in American stocks (deposit/withdrawal of funds) go through one broker, which reduces the cost of commissions.
  • The minimum threshold for entering the market, access to mini-contracts.
  • The optimal solution with local taxes and reporting, since the exchanges are tax agents.

The main problem with such a scheme of work is the low (relative to foreign sites) liquidity for US assets.

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2. Investing in stocks on American stock exchanges through a foreign broker

You can get to the American stock market through the exchanges of other countries using the depositary receipts mechanism or direct listing, but you can open a trading account with a licensed broker with direct access to the NYSE and NASDAQ exchanges. The NASDAQ mainly trades high-tech stocks, while the NYSE trades all other sectors. Sometimes companies to invest in US stocks have the sign of private or semi-public funds. What does this mean for the average investor?

1. Access
You get maximum access to all instruments in the American stock market.
2. check-in
The procedure for opening an account is more complicated than through a national broker and can take 1-2 weeks. Money for trading will have to be transferred to a foreign account, banking conditions and possible problems must be resolved in advance.
3. Depositary
The client enters into an agreement for depository services with the broker, after which he transfers the funds to the broker. It is the broker who, on your behalf, will carry out investments in the shares of companies.
4. Insurance
As a rule, a foreign broker carries out liability insurance in the event of its own bankruptcy. The amount of compensation to the client can reach $ 100 thousand in the USA, in Europe – up to € 20-50 thousand.
5. Tax
Usually, such an intermediary is not a tax agent and does not transfer information about transactions to your tax authorities, so reporting and paying taxes are the client’s problems.
6. The language barrier
There may be problems when using trading software, technical support and analytics.

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3. Investing in US stocks through a national broker

For most local brokers, direct access to global stock markets can be too expensive, so an intermediary partner is used. What does this mean for the investor?

  • You get full access to the American market, including ETFs, private funds, any exotic and any investment ideas.
  • The account is registered by the national broker through its representative or branch.
  • High entry level – from $ 5-10 thousand, insurance or segregated accounts are rarely offered.
  • In addition to direct commissions of the exchange, double costs for a national and foreign intermediary are possible – up to $ 10-20 per operation or per 1 share, as well as for deposit and withdrawal of funds.
  • In some cases, when investing in shares of foreign companies, a client can use a foreign exchange license (and possible privileges) of a national broker. The client performs the declaration of income independently.

For beginners, it may seem like a huge selection of assets is a very good thing. But if you want to really participate in the profits of world corporations, then it is not enough for you to buy securities, even if these are US stocks – the most profitable investment in the world. Shares need to be able to manage, like any other asset, so knowledge and experience is a must.

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