Candlestick Trading Blog

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Dividend Stocks: Basic information to get you started.

Dividends are an additional amount that an investor receives when the stocks or bonds that they are invested in perform well enough so that they can give a profit to the company the dividend stocks were issued from. Many companies pay dividends based on a portion of their profits, which is that portion divided up among those who have invested it in their stock. These companies do this to share their profits with those who buy stock and help them stay in business and as a thank you to their investors. Please understand the basic stock investing concepts when researching dividend stocks.

Dividend stocks are less volatile due to the fact that companies that pay out cash result in investors more willing to hold dividend stocks through bear markets. Dividend stocks tend not to rise as quickly as non-dividend stocks during roaring bull markets.  Dividend stocks also do not fall as far as rapidly as non-dividend stocks. Investors are now looking for downside protection due to slow economic growth.

Dividends are paid on earnings per share meaning the more shares of a particular stock that you have the more you will receive when dividends are paid. This normally occurs quarterly, during earnings season, and when businesses report earnings and profits or losses on dividend stocks. Some dividends are paid on certain bonds or other investment options that are done through a money market account. These dividends are a form of interest for the investment. In most cases, dividends are paid into a money market account so that you can withdraw them reinvest them.

Dividend stocks get favorable tax treatment. Thanks to a change in a tax law in May, 2003, most dividend stocks are taxed at only 15%, however, previously, dividends were hit at full income-tax rates. This means that investors may get additional current income from a high-yielding dividend stock than they would in a money market account or a COD (Certificate of Deposit) as part of their investing strategy. The tax change has generated savings for individuals so far totaling roughly $30 billion. When the tax break expires in 2008, some investors project that it may be stretched out longer. This should provide savings to investors that will exceed and estimated $100 billion.

Dividend stocks dividend yield: The dividend yield is a company's subsequent 12-month dividend(s) divided by the company’s current share price. Higher payouts increase the yield and the dividend hike usually increases the share price. Companies whose stock price history demonstrates strong dividend growth are typically committed to continuing that strategy. Do your research on dividend stocks to find out which companies do not consistently increase dividends because they prefer to use their spare cash for other reasons.

Please note that high-yielding stocks are high because many investors see them as risky, and as a result, are not always the preferred choice. You want the dividend stocks high, but not too high of a stock market risk.  Buying pressure will often push the share price up only until the yield drops back down closer to more realistic market sectors stock rates. Some investors will set their maximum acceptable dividend yield at 5 percent, as a guideline. Others will push to a maximum of 8 percent for riskier dividend stocks.

Reinvesting dividends is a relatively easy way to make additional income off of dividend stocks (a particular stock) or investment.  The investment is doing well enough to be paying dividends, and the reinvestment means that you have more of the stock than you did previously. It is also just as wise to choose not to reinvest your stock dividends. This is most likely true when you are holding a balance in your money market account to take advantage of a high interest rate that's being paid to it. It is also true when you are receiving dividends from short-term investments that you plan to cash out soon.

Right now is not the time to wage heavily on banks when dealing with dividend stocks. Strong banks have been fine dividend-payers in recent years, however with rising interest rates, mortgage profit margins are pinched, and the demand for new mortgages is decreased. It is proving okay, however, to work with small or regional banks which have proven to provide outstanding strong profits from servicing and making home mortgages.

There are many additional resources you can utilize when beginning investing in the stock market. Please be sure to do your research!