What is dividend investing?

August 11, 2011


What is dividend investing?

Roger from Birmingham.

{ 3 comments }

sjdotsch August 11, 2011 at 5:17 pm

Roger’s question, for which our thanks – what is dividend investing – is an appropriate subject to launch our second dedicated news and commentary channel called Talk Dividends.

Talk Dividends aims to inform you about the benefits of dividend investing. We welcome your questions and comments. We are inviting guest writers and dividend income bloggers to share their dividend investing views. You can also start a conversation – please just use the Feedback form listed in the Admin Menu.

We are also working towards interviewing successful dividend income fund managers sharing their investment methodologies and strategies.

But first . . . What is a Dividend?

Companies that earn a net profit can do a number of things: pay some of that profit out to shareholders, reinvest it in the business, reduce debt or repurchase shares.

When a portion of the net profits is paid out to shareholders, the payment is known as a dividend. In the UK, dividends are usually paid twice per year.
What is dividend investing?

Returns from savings and investments have been on the minds of many savers, investors and retirees in recent years, and, for good reason.

Austerity measures, inflation, higher taxes, lousy salary prospects and depressed investment returns have all increased the appeal of varied but regular and increasing income streams which dividends can offer.

Tony Stenning, Head of fund manager Blackrock’s UK Retail Business has worded it as follows “Today’s savers and investors face cash interest rates at record lows, diminishing fixed income yields demanding a higher risk appetite, and stubbornly high real inflation.”

Tony added “Dividend investing represents a ‘best of both worlds’ option – one in which investors are able to preserve and grow their capital, while generating consistent, steady growing income.”

Why do companies pay dividends?

Companies that pay growing dividends are most often companies that have progressed beyond their initial ‘high’ growth phase.

Sometimes companies no longer benefit sufficiently by reinvesting their profits. They may then decide to pay out an increasing part of their net ‘surplus’ profits to their shareholders.

When these kind of companies start to pay regular dividends than holding shares in these companies becomes increasingly appealing to a certain type of investor – investors in dividend paying shares.

What types of investors prefer dividend investing?

Typically, dividend investing is popular among (future) retirees and those who want to live on the returns of their money and are no longer able or willing to work.

Dividend investing is also popular among those investors who prefer lower-risk investments such as from solid and stable companies paying regular dividends. While these types of companies continue to grow, albeit often slowly, often their dividends grow annually, providing ever more value and return to a dividend investor.

What is your take on dividend investing?

Alex August 12, 2011 at 10:05 am

I may only be in my late teens, but I can really see the value of owning dividend paying shares. My thanks to Steven for starting this website so that I can find more dividend paying shares and buy them at the right price at the right time.

pablodavis August 29, 2011 at 10:24 am

Yes, I do have to agree with the above comments,

To me personally divdends is like and insurance on shares, which over time reduces the cost I have purchased them at.
Also in the meatime the shares may have increased in value.
Paul

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