A Guide To Dividend Investing - 2021
One of the most tempting goals of investing is passive income. It is the investment income that encourages many to invest. In the case of shares, passive income can be obtained in the easiest and most reliable way. It is, of course, the payment of dividends. Thus, it is possible to speak about dividends as a secondary target or as a separate strategy. In the latter case, there is such a direction as dividend investing.
Today we will look into this topical direction! Let's find out what dividend investing is, how profitable it is to invest in them, what an investor should expect and how to calculate dividend yield correctly. And, many other small questions.
What Is Dividend Investing?
As it comes from the name, dividend investing is the investing in shares on which dividends are regularly paid. It should be noted at once that not all shares are dividend-oriented in principle. Moreover, not all shares pay appreciable dividends. It turns out that besides dividend shares there are also shares without dividends and shares with very small dividends.
For this reason, in the investment environment, dividend stocks and investments in them are, as a rule, the stocks on which more or less high dividends are paid. The amount of "high" dividends may vary depending on the investor's approach or opinion. But the practice of dividend investing usually operates with values of 2% and higher. And in most cases, even 3% or higher.
It turns out that a stock can be considered a dividend stock (in terms of investment strategy) if it pays an annual dividend income of 2% or more. Values below 2% are also important for an investor, but it would be rather difficult to form a dividend portfolio at such rates. Consequently, you will need hundreds of thousands or even millions of dollars to get an adequate passive income.
In the simplest sense, dividend investment means that you buy shares, and after a short period you begin to receive steady dividend payments. The aggregate of the dividend payments forms a cash flow that the investor is free to dispose of. In fact, this is a passive income, as close to this concept as possible, as it is. That is, you really do not have to do anything (unlike rent, business investments, etc.).
At first glance, the situation may resemble a bank deposit, but this is different. The dividend stock or ETF itself may fluctuate in value. However, the income that is paid to holders is usually independent of the value of the security itself. For example, if you get $1.25 per share, you'll get these funds even if the stock falls 10-15% in price. At the same time, as a percentage, you will even see an increase in the dividend rate.
An investor who wants to receive a tangible dividend investment income forms a portfolio of shares. And at predefined periods and dates, he receives the corresponding money to his account. Thus, investing in dividend stocks means buying dividend-paying stocks and holding them for a certain period, receiving dividends on them in the form of cash.
Schedule of Dividend Payment
To get your share of the issuer's profits, there is no need to hold the shares for a long period - it is enough to competently operate with the well-known dates of dividend accrual.
The main dates that matter in yield payments are:
- record date;
- ex-dividend date;
- declaration date;
- payment date.
The record date is the day on which the list of all shareholders of the issuer is fixed. It is noteworthy that the period during which the trader owns the shares does not affect the payments: you can buy the shares both several months and several days before the record date and still get your dividends.
The ex-dividend date is the last day of purchase, giving the right to yield in the form of dividends. It considers the peculiarity of the trading mode "T+2", which means that the trader becomes the official owner of assets two working days after the transaction. Accordingly, a trader who bought company shares in the last minutes of trading receives the same rights to payments as a trader who held them for a long time.
Declaration date - the day when the official information about the amount and date of payments is announced. The amount and dates of dividend payments are decided at the general meeting of shareholders.
The date of payment implies the transfer of the income to the account of the shareholder. Most often, this happens within a month of the record date. Certain companies accrue dividends several times a year: every six months or every quarter.
So that you don't have to keep the due dates in mind, calendars specifically indicate the dates when shares can be purchased with the expectation of receiving a dividend.
Let's have a look at the calendar offered by investing.com. As you can see, it is very convenient since there is an ex-dividend date and payment date. Additionally, you can see here if the dividend is quarterly or annual. Apart from that, there are filters that help you to track those companies you are interested in.
Types of Dividends
Dividends are most often divided into the following varieties:
Regular dividend. This type of dividend is paid by most companies, and it is of primary interest to dividend investors. Regular dividends can be paid annually, semiannually, quarterly, or monthly.
Extra dividend. Under certain circumstances (accumulated profits, a good deal), companies may make extraordinary one-time payments to their shareholders. As a rule, the extra-dividend is larger than the regular dividend and is paid quite rarely.
For example, U.S. application technology firm Leidos Holdings, Inc. (NYSE: LDOS), which pays $0.32 per share to shareholders quarterly, distributed a $13.64 special dividend in August 2016, which is 28% of its share price.
Liquidating dividend. As the name implies, this dividend is paid in the event of liquidation of the company. After the sale of the company's assets and payment of debts, the remaining funds are distributed to shareholders.
All types of dividends can be classified in many ways, but in terms of investments, not all of them will be of practical importance.
In addition, dividends can be classified by the firms paying them or not, as well as by the regularity of their payment. But perhaps the most important criterion for the investor can be considered the ratio of dividends to the rate of inflation or bank rates on deposits. That is, to what extent the dividend income will be higher or lower than the interest paid by the banks and how much of it will be "beaten" by inflation in a particular year.
All stocks are divided into two categories that differ in the form of dividend payments. And it is this distinction that is most important to the investor.
Ordinary shares. Dividend payments on this type of shares are not fixed and depend on the company's income: if the company makes a loss, shareholders are left without dividends. If the company goes bankrupt, the holders of these shares will be at the end of the queue claiming a share of the JSC. Other restrictions on the payment of interest may also be imposed on behalf of the board of directors or by law.
Preferred shares. Interest is guaranteed to be paid to holders even in the event of loss-making statements, and in the event of bankruptcy of the issuing company, it is redeemed at market value after its debts have been paid in the order of highest priority.
Preferred shares can be of different types. They are also divided into Cumulative Preferred Stock and Non-cumulative Preferred Stock.
The essence of Cumulative Preferred Stock is the accumulation of partially paid or completely unpaid dividends (Passed Dividend) for the periods when the company experienced financial difficulties. In the case of non-cumulative preferred securities, there is no accumulation of dividends.
How To Calculate Dividend Yield
Let us see first what a dividend yield is. Basically, it reflects the amount of profit that an investor will receive relative to his investment. It also shows the overall situation of the company and its investment attractiveness. The higher the yield, the more attractive the company is. Further, a profitable company will receive new investments, which will allow it to develop at a higher rate, and, accordingly, remain attractive.
The yield is calculated using the formula:
Dividend yield =(Annual dividend per share/Share price) × 100
Normally, the annual dividend is taken from the previous year, but if the calculation period is a quarter, the quarterly payout is simply multiplied by 4. Considering that the share price is constantly changing based on the market situation, in some cases, the calculation of the share price is taken as an average. Thus, it is possible to obtain an average value for the yield. For example, let's take a figurative company and round numbers to simplify the calculations. The LLC company issued 1,000 shares of stock, which ended up being worth $20 each. The dividends paid for the previous period were $5 per share. By substituting the values into the formula, we get that the dividend yield is 25% per annum.
Let's take another example. The "ABC" company issued 1,000 shares, valued at $100 each. The dividend for the example is left at the same level of $5 per share. Calculating the formula, we get a dividend yield equal to 5%.
As we can see, the amount of payouts for these companies (per share) is the same, but in percentage terms is significantly different. In this case, investors are more likely to choose a company with a higher dividend yield. And by calculating how many shares you can buy for a certain amount, you can estimate the final return on the investment.
One more example. A hypothetical investor has $1,000 available. He decides to invest them in the above-mentioned companies. This gives us the following figures:
First option: with 1000 dollars he can buy 50 shares of the company "Ltd." (considering their price of 20 dollars each). In this case, the dividend yield is 25% per annum, which in money terms equals $250.
The second option: you can buy 10 shares of the "ABC" company for $1,000 (given their price at $100 apiece). In this case, the dividend yield is 5% per annum. In terms of money, the investor will receive $5 per share, which is $50 in profit.
As we can see, in the first case, the company is more attractive from an investment point of view, and the investor will receive more profit for each dollar invested. But there are other factors to consider when choosing a stock.
In these calculations, we need to consider the fact that we take the figures for the past period, and this does not guarantee that in the future we will get the same or even greater profits. In this example, we have calculated the conditional return on a conditional company. The numbers are much smaller and fluctuate around 5-7% on average.
Dividend investing risks
The main, and usually not obvious to many, risk of dividend investment is a " shrinkage " of capital. Or, in other words, its reduction. In addition to this, there are also inherent risks, in particular:
- Reduction of dividend payments
- Complete cancellation of dividends
- The bankruptcy of the company
Depreciation of dividend shares (capital squeeze)
This is the most "problematic" moment when investing in dividend stocks. Unfortunately, not all investors understand this from the start, and in the absence of preparation or initial advice on portfolio composition and management, they are caught off guard. Cheaper dividend stocks result in a squeeze on your capital and unrealized losses (until you lock them in). In the case of dividend stocks, reverse "moves" are generally not seen. If the stock has fallen heavily, there is a good reason, and it does not bode well.
A dividend reduction is an extremely unpopular measure. The vast majority of companies will be willing to take any measure, but not to cut dividends! Nevertheless, the coronavirus crisis and the changes coming after it has changed the rules of the game. To increase liquidity and flexibility, with great reluctance, boards of directors and shareholders are considering and introducing dividend cuts when necessary.
Many companies can cancel dividends only in extreme cases. This is a very painful moment and an extremely negative signal for the market and investors. However, even though first-rate companies don't cancel and even try not to reduce dividends, things happen. And the last year's problems demonstrated that with live examples. Many companies have canceled dividends altogether. At the same time, the value of the stocks in question is in the dividend payments. Accordingly, the cancellation of dividends puts an end to the value of these stocks.
Therefore, in case of cancellation of dividends, you can lose 100% of your profits and incur serious losses. If the dividend company cancels the dividend, the stock price instantly falls to critical levels. That is because dividend stocks are rarely bought for value appreciation. One prefers investing in dividends precisely to generate constant cash flow from dividends.
One way to solve this problem is to diversify widely. Compiling a portfolio of companies (or ETFs) in different areas and types helps minimize losses in the event of a crisis.
The bankruptcy of the company
This risk is naturally inherent in all stocks, but trying to make regular, high-interest payments can bring a company to the brink of bankruptcy. And this is more realistic than among companies that don't pay dividends. Because of this, it's worth carefully selecting stocks for your dividend portfolio. If except for REITs, we see a high dividend payout ratio - it's better to give up on such investments.
Dividend Tax Rate UK
In the UK, there is a special approach to determining the status of a taxpayer. It depends not only on the tax residency of an individual but also on his domicile (place of permanent residence).
A person can be recognized as a tax resident according to some criteria, the most important of which is the actual presence in the country for at least 183 days during the tax period.
If a person is simply a resident without domicile status, he receives a special benefit, which allows him not to pay tax on his foreign income. But only on the condition that he does not bring it into the UK.
No tax is payable on dividends if the dividend income is within the £12,500 threshold.
Moreover, the dividends themselves also have their own thresholds up to which dividend tax is not payable. The standard rate of tax on dividends is 7.5%. However, dividend tax has many features on which the rate depends, so the calculation of the final rate must be done on a case-by-case basis.
Dividend Adjustment in the Indices
Stock indices, such as the Dow 30, FTSE 100, and DAX 30, are calculated based on the value of their constituent companies.
As we know, the payment of dividends by these companies causes the stock price to fall (or rise) and affects the overall value of the index.
Brokerage firms make this dividend adjustment in the indices at the opening on the day of the dividend payment on the underlying stock. This drop in the price of the index will affect the PnL on the open CFD trade on the index. To compensate for this, the trader's account will be debited or credited, which will be included in the swap, which will accrue around 00:00 server time. If you have a long position, your PnL will be negatively impacted, so your account will be offset by the same amount as the dividend adjustment.
If you have a short position, your PnL will be positively impacted, so your account will be debited the same amount as the dividend adjustment.
It is important to remember that traders do not profit or lose from these adjustments. That is a zero-sum situation where any change in PnL has a corresponding write-off or accrual to compensate. Let's look at a few examples:
- You have a 10-lot position to buy the Dow Jones at 00:00 server time. On the next trading day, several companies announce dividends, which causes the Dow Jones to drop 20 points when the market opens. There will be a $200 (20 pips * $10 per expiration point) charge on the swap on this position. The Dow Jones will open 20 points lower than it would have without the adjustment. As a result, the PnL on the buy position will worsen by $200, which will be offset by the swap accrual.
You have a 10-lot sell position on FTSE100 at 00:00 server time. On the next trading day, several companies announce dividend payments, causing the FTSE100 to fall 15 points. This position will be deducted £150 (15 points * £10 per point). The FTSE100 will open 15 points lower than it would have been without the adjustment. As a result, the PnL on the sell position will improve by £150, which will be offset by the negative swap.
Trade CFDs on the DAX 30
If you don't trade indices, you really should start doing that and watch for trading breakouts. There are so many cases where the market enters a new trading zone. The same is true when the breakout is short. When there is a downtrend in the indices, risk moves tend to happen faster with more momentum.
Unlike the Dow Jones and most other fundamental indices, the DAX30 refers to dynamic indices. It means that the data is updated regularly, which not only leads to changes in quotes, but completely changes the market situation. If you have the time, determination, and desire to make money, the DAX is one of the best instruments for scalping. One of the reasons for this is the high value of the index and the generally low spreads available. That makes it perfect for scalping.
The cost of trading is only one aspect. The market still needs to be "scalable." Fortunately, the DAX is extremely technical even with small moves that are suitable for scalping.
It works well on support and resistance levels, reversals, and round numbers. It should also be noted that the DAX can be traded in reverse scalping, which makes this index completely versatile for CFD contracts.
What is the best way to analyze the DAX30? This index repeats predictable and consistent patterns that we can use to trade and profit. Accordingly, the success of trading depends more on technical analysis.
Let us have a look at how to place an order in the Meta Trader trading platform.
First off, run the terminal and find GER30 in the list of the symbols on the left side of the terminal. Next, right-click on the ticker and choose New Order from the appeared list.
In the New Order window, you can set the trading volume and Stop-Loss/Take-Profit.
Once all the parameters are set, click on the Buy by Market.
It should also be noted that the CFD contracts on the DAX30 are a sound financial trading tool that allows you to obtain a constant source of income and keeps you trading with confidence.
Being a well-established brokerage company, AdroFx offers the best trading conditions to its clients from 200 countries. Founded by experts with a couple of decades of the overall experience, AdroFx is one of the best platforms on the market for shares trading. Either a newbie or experienced trader, both will find here what they are looking for since the company provides various trading accounts for different trading styles and goals.