How To Buy Dividend Stocks in Australia For Passive Income

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Students want to know what dividends are, how they work, and how they can invest in dividend shares.


When listed companies profit, they save a particular portion of their earnings for future growth and distribute the rest to shareholders via dividends.


Stocks that pay dividends are often an excellent choice for investors who look for passive income and want to add stability to their investment portfolios. "Dividend Reinvesting" is a strategy that benefits "Compounding", which further helps grow their investment portfolio.


In this blog, you will learn how to buy Australia's best and highest-paying dividend shares to reap their benefits.


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1. What Are Dividends?


Dividends are a portion of a company's profits or earnings distributed to its investors. Companies typically choose to pay dividends when they have achieved profitability.


Nevertheless, certain dividend-paying companies may continue to offer dividends despite not being profitable. Additionally, numerous companies prioritise reinvesting their profits into business expansion rather than distributing them to their shareholders.


Dividend payments are crucial in investors' company selection criteria, significantly influencing their investment decisions. These payments enhance shareholders' overall returns by offering a consistent income stream and fostering stock price appreciation.


Dividends are calculated and distributed per share to eligible stockholders monthly, quarterly, or yearly.



2. What Are Dividend Stocks?


Dividend stocks are established companies with a robust history of consistently sharing their earnings as "dividend payments" with their shareholders.


While these stocks generally add stability to an investment portfolio, they tend not to outperform high-quality growth stocks.


Owning dividend stocks entitles you to receive a modest percentage, typically 2% to 8% of the stock price.


However, certain dividend stocks may offer even higher dividends, exceeding 30%. An ASX 200 company maintains an average dividend payout ratio of approximately 4%.



3. Why Do Companies Pay Dividends?


Companies do not have any obligation to pay dividends.


They distribute a portion of their profits among their investors as it helps them maintain a loyal base of shareholders and bring in new ones. They do it to reward their existing shareholders and attract more investment.


Dividends benefit shareholders, positively impact companies' balance sheets, and help improve their "Return On Equity."



4. How Often Are Dividends Paid?



Many shareholders choose shares based on whether or not a company pays dividends, how often it pays (quarterly, annually, or semi-annually), and what size of dividend it pays.


Most large-cap companies on ASX pay dividends twice a year, about six months apart, as an interim and final dividend. Listed Funds tend to be spent every quarter (i.e., once every three months).


If a company makes a bulk profit in a quarter/year or any particular event, it can even pay a special dividend to its investors. You can find the history of the company's dividend payments in its announcements on ASX.



5. How Do Dividend Stocks Work?


When you purchase dividend stocks, you can receive dividend payments in the form of:


  • Cash payments

  • Stock dividends

  • Dividend reinvestment programs or DRIPs

  • Special dividends


Cash-based dividends are the most typical dividend payouts directly into your investment account. You can either withdraw it or use it to grow your portfolio.


You may even receive stock dividends or extra shares of your stock. Some companies offer DRIPs, where you reinvest earned dividends into the company. Some companies also provide special dividends that are an additional, one-off bonus outside of regular dividends.


To be eligible to receive the dividend, you must buy the dividend before the ex-dividend date. It is the cut-off date to receive the declared dividend. The ex-dividend date is usually one day before the record date. On this day, the company compiles a list of eligible shareholders for the dividend.


So, to receive the dividend, you must buy the shares before the ex-dividend date. This way, you will be on the company's shareholder books before the ex-dividend date and entitled to the declared dividend.


If you miss this date, you must wait until the next payment, which could be next month, quarter, or year. Irrespective of whether the company's stock price reduces or increases, you will receive dividend payments as long as the company continues to distribute them.



6. What Are The Different Types Of Dividends?


You can categorise dividends as fully franked, semi-franked, or unfranked.


Franked dividends imply that the company has paid tax on the profits generated in a year. So, stockholders do not need to pay taxes on the same money again. They get a 'franking credit' linked to each dividend that may allow them to lower their tax liability to some extent.


Unfranked dividends imply that the company didn't pay tax on their profits in a year. Thus, its stockholders do not get any franking credits.



7. What Is Dividend Investing?


Dividend investing is a popular investment strategy that investors use to build a passive income and obtain higher portfolio returns.


The technique works on the principle of compound investing, giving you better returns with less money and time.


This strategy is only for some investors as it usually doesn't see capital appreciation. People use it to invest for dividends, not company growth and stock price appreciation.



8. What Are Ways To Invest In Dividend Stocks?



You can invest in dividend stocks in three main ways:


  • Individual Dividend Stocks of Companies: Identify dividend-paying companies with good fundamentals and have a long history of raising payouts annually, such as Walmart.


  • High-Yield Mutual Funds Include Index Funds or Exchange: Traded funds that hold dividend stocks with higher-than-average dividend yields. It can be attractive for those looking for a more diversified approach. For Example., Vanguard High Dividend Yield ETF (VYM) holds consistent dividend payers such as Johnson & Johnson, Home Depot, and JPMorgan Chase.


  • Dividend-Appreciation Funds and ETFs: This approach includes companies with a history of rising dividend payments over time. While they offer lower yields than funds whose main aim is to deliver high payouts, they may give you high earnings growth rates and stock price appreciation over the long term. Dividend growth funds primarily include Walmart, Apple, Microsoft, and Visa companies.



9. Steps To Buy High Dividend Paying Stocks Australia


Creating a portfolio of individual dividend stocks or funds takes time and effort, but it is worthwhile for most investors.


Here is how to invest in dividend stocks for passive income:



Step 1: Sign Up With A Share Trading Platform


The first step is to sign up for a trading platform that lets you invest in dividend stock.


You must compare various online stock trading platforms to find the most suitable one. Thoroughly assess whether they have an Australian Financial Services Licence, what they charge, how they pay dividends, etc.



Step 2: Have An Investment Plan


Before you start investing in dividend stocks, you should specify dividend investment objectives: 


  • How much to invest in dividend stocks? What dividend stocks or ETFs will you have in your portfolio?

  • Will you reinvest all the dividend income so that your dividend payments compound? Or Will you take out half of the dividend payment and reinvest the other half immediately?

  • For how many years will you do dividend reinvesting?



Step 3: Find A Stock of A Company That Pays Dividends


Do your research using historical data to calculate dividend yields, dividend payout ratios, growth, dividend cover ratios, etc., to analyse dividend stocks. 


Study a company's balance sheet, including cash reserves, debt, and other assets and liabilities, to determine its reliability and profitability. Also, check whether it pays dividends consistently and on time, follows a progressive dividend strategy, and regularly increases its dividend payouts.


Consider the company as well as the industry it operates. Check whether the company's business is at risk from its peers, has weak demand, or is facing some business challenges or disruption.


You can also use a market screener to screen dividend stocks on several financial sites and your online broker's website. Compare companies' dividend yields among their peers to make a buying decision.



Step 4: Decide on Portfolio Diversification


Dividend-paying stocks are perceived to add stability to your portfolio and help reduce losses in adverse market conditions. Decide what percentage of your portfolio you want to dedicate to such stocks. 


You must consider the nature of dividend stock, such as whether it is risky or safe, and your tax obligations.



Step 5: Understand Dividend Reinvestment Plans


Typically, the company sends dividends directly to the stockholders' bank accounts. However, there is also an option to reinvest the dividend income into the market. This is called a Dividend Re-Investment Plan (DRIP). 


Some Australian brokers offer a feature where investors can automatically set up DRIP to reinvest their dividend amount in buying more company shares. Choosing dividend reinvesting gives you the benefits of "compounding" and higher portfolio returns.



10. How To Pick The Best Dividend Stocks?



As everyone's investment goals may differ, no stock is ideal for everyone. It would help to consider a few factors before choosing the right dividend stock based on your financial situation and objectives:


  • Dividend yield per share

  • History of dividends

  • Is the company making repeated profits

  • Fundamentals of the stock (cash flows, low debt, profit, and revenue generation). 

  • Sustainability of the dividends in the next five years 

  • Technical analysis (the right price to buy the dividend stock)  


Look for businesses that have the following characteristics:


  • Profitable

  • Low debt-to-equity ratio

  • Consistent and reliable cash flow from a service or product

  • Have a competitive advantage

  • Have a good track record of paying dividends.

  • Have historically outperformed the stock market with less volatility

  • They have been increasing their cash flows, ultimately driving dividend growth.



11. Important Terminologies Used In Dividend Investing



  • Dividend Data: Dividend data gives you the details of the company's recent or all cash dividend payments: the Dividend amount (a percentage of company earnings), the Dividend record date, the Dividend Expiration Date, and the dividend payable date. You only need to search for the company code on the ASX to view the dividend details.


  • Ex-Dividend Date: The ex-dividend date is when the stock price reduces by an amount equal to the dividend. It is one business day before the record date of the company. If you buy a stock on or after this date, you are not eligible for the dividend payment. Only those who buy the stock before this date are entitled to the dividend. 


  • Record Date: As with any stock you buy, it takes two business to arrive in the Demat account and settle. The Record Date is two business days after the ex-dividend date. On this date, a company closes its stock register (usually around 5 p.m.) to finalise registered stockholders eligible for the current dividend.


  • Payment Date: As the name suggests, this is the date a company pays the dividend to its stockholders who had the shares in their Demat account on the record date. It is usually 2 to 3 weeks after the Record Date.


  • Dividend Reinvestment Plan: Some stock brokers provide an automated feature that enables users to reinvest the dividend earned to receive new shares in the company. Some brokers even offer incentives such as discounts on the average share price over a period and don't charge any trading or brokerage fees. Investors can buy more shares and earn more dividend payments next time using this passive investing strategy. As their shareholding increases, they get more benefits of "Compounding" from their dividend payments.


  • Cash Dividend Payout Ratio: A cash dividend ratio and the simple payout ratio help investors understand a dividend's sustainability in a company. It is the percentage of a company's operating cash flows minus free cash flow or capital expenses.


  • Dividend Payout Ratio: Dividends are paid based on the company's profit quarterly/semiannually/ annually and its current free cash reserves. The dividend payout ratio gives investors an idea of how easily the company can afford to pay its dividend. You can calculate the payout ratio by dividing the yearly dividend per share by the earnings per share (EPS).


  • Dividend Yield: The dividend yield is a percentage that helps investors compare returns on investment of different companies. Dividend Yield (in %) = Dividends paid over the last 12 months/ Current stock price.



12. What Is The Dividend Yield?


The dividend yield is a financial ratio showing the percentage of a company's stock price that it pays out yearly dividends. You can calculate it when dividing the annual per-share dividend by the stock price.


Dividend Yield = Dividends per share/current share price


Generally, as a stock's price rises, its dividend yield reduces. You can use the dividend yield to compare direct peer companies, ETFs, or mutual funds and determine where you get the most for your money.


The higher dividend yield benefits income investors, but abnormally higher yields can indicate heightened levels of risk.


Based on market conditions, the average dividend yield on dividend-paying companies listed on the S&P 500 index historically fluctuates between 2% and 5%.



13. What Are The Best Dividend Stock Investing Strategies?


Dividend stocks are not just for retirees or risk-averse investors; they are ideal for any portfolio as they help diversify it. 


Investors who are interested in "Dividend Investing" can consider the below aspects to build their portfolio of dividend stocks:



Select The Type Of Dividend Stock



  • Dividend Yield: Buy dividend-paying stocks or funds that offer high dividend yields. Such companies could either be undervalued or face particular business challenges that have reduced the stock price and increased the dividend yield. Sometimes these companies may reduce their dividend yield in the future to address financial problems.


  • Dividend Growth: Alternatively, you can own stocks of companies or funds that have steadily increased their dividends over time. Though they offer lower dividend yields than high-dividend stocks, they have healthy businesses with consistently rising earnings.


  • Dividend-Focused ETFs or Mutual Funds: The option lets investors own diversified portfolios of dividend stocks to generate passive income.


You can reduce the chances of a dividend cut by choosing companies with a sound financial profile, focusing on a growing industry, and consistently raising their dividend payout.



Set Up a Dividend Reinvestment Plan 


After you build your portfolio with the right dividend stocks, the next step is to determine how you wish to reinvest your dividends. You can do it manually or set up a dividend reinvesting plan or DRIP.


Many brokers offer dividend reinvestment plans to investors, in which every dividend received is reinvested into the company at no extra fees/ commission. This is the easiest way to use the power of compounding value and time to build wealth over the long term.


Adding dividend stocks to your portfolio helps lower volatility and amplify your total returns regardless of what dividend strategy you incorporate. It will help to realise your financial goals fast.



14. Top Brokers To Buy Dividend Stocks In Australia


Several top online stock brokers enable you to purchase dividend stocks in Australia.



Stock Broker Name Price Per Trade Inactivity Fee Markets Served International
IG Share Trading $8 No ASX shares, US shares, UK shares, ETFs, and more Yes
CMC Markets Invest   No
ASX shares, Global shares, mFunds, ETFs

Tiger Brokers $6.49 No ASX shares, Global shares, Options trading, US shares, ETFs Yes



15. How Do Dividends Impact A Stock's Share Price? 


When a company announces a dividend payout, most investors purchase shares before the ex-dividend date, often leading to an increase in the stock price.


However, when the ex-dividend date arrives, the stock price experiences a decrease equal to the dividend amount. Importantly, this decline is usually temporary, and the stock price gradually recovers.


This drop in stock price is especially noticeable when dealing with high-yield dividends. In contrast, for smaller payouts, the difference in share price might not stand out as much.



16. How Can You Use Dividends? 


It depends on how the company allocates the dividend. It can be in the form of cash, stocks, or a dividend reinvestment plan.


  • You can withdraw the cash dividend.

  • You can automatically reinvest your dividend income through a dividend reinvestment plan (DRIP) to gain more shares of that company. This way, your investment and returns will increase year-on-year exponentially and become a larger investment to fund your long-term financial goals. 


The following illustrates an example of a dividend reinvestment plan:


  Share price Dividend amount Dividend paid Shares bought from dividends Investment value
Start $5.00 N/A N/A N/A $1000.00
After 1st year $5.00 20c per share $40.00 Eight shares (208 in total) $1040.00
After 2nd year $6.00 24c per share $49.92 Eight shares (216 in total) $1296.00
After 3rd year $7.00 28c per share $60.48 Eight shares (224 in total) $1568.00
After 4th year $8.00 32c per share $71.68 Eight shares (232 in total) $1856.00
After 5th year $9.00 36c per share $83.52 Nine shares (241 in total) $2169.00
After 6th year $10.00 40c per share $96.40 Nine shares (250 in total) $2500.00
After 7th year $11.00 44c per share $110.00 Nine shares (260 in total) $2860.00
After 8th year $12.00 48c per share $124.80 Nine shares (270 in total) $3240.00
After 9th year $13.00 52c per share $140.40 Nine shares (280 in total) $3640.00
After 10th year $14.00 56c per share $156.80 Nine shares (291 in total) $4074.00



17. Who Should Invest In Dividend Stocks?


Dividend-paying stocks or dividend stock funds are a fabulous way to obtain passive income from a stock portfolio.


A portfolio of dividend-paying stocks can compound substantially over several years. It also provides a more effective hedge against inflation than bonds.


Investors seeking long-term wealth creation should consider investing in dividend stocks as part of their investment strategy.



18. Why Invest In Dividend Stocks?


Below are several compelling reasons why including dividend stocks in your investment portfolio can be highly beneficial:

  • Dividends are a significant contributor to investment returns. They provide a steady income even when the market decreases or moves sideways.

  • Dividend reinvestment can help you build long-term wealth over time.  

  • Besides dividend income, investors can also benefit from potential share price increases. Combining those dividends with capital appreciation can give you total returns that exceed even those of the broader market.

  • Buying dividend-paying stocks of established companies with a record of returning earnings adds stability to your stock portfolio. 

  • By investing in dividend stocks, investors can earn a return on their investment as dividends without actively trading shares. It is beneficial when the market is down.

  • Dividends offer a good hedge against inflation when they increase over time. They can also be franked and provide specific tax benefits to shareholders, making them a tax-effective form of income. 

  • Dividend payments are predictable quarterly payments that help shareholders support their lifestyle. 

  • Dividend returns can be more reliable and stable than capital gains. They can also support stock prices during times of economic stress.



19. What To Look For When Opening A Dividend Stock Account?


Before you proceed to open a dividend stock account, make sure you check the following considerations:



  • Trading Account Fees: Fees are an important consideration as they could impact your overall returns on an investment account. Dividend investors should find a no-commission broker to buy individual dividend stocks. If you gain exposure to dividend stocks via ETFs or mutual funds, look at the expense ratios and fees those funds charge.


  • Minimum Fund Requirement: Most online brokers don't have account minimums; however, some mutual fund companies may require you to meet minimum investment criteria when investing directly through them. To waive this requirement, consider accessing dividend ETF's mutual funds through commission-free online brokers.


  • Trading Tools: Find a broker that offers you a good stock screener, price chart, etc., to perform good fundamental and technical analysis when researching companies and industries.


  • Customer Service: Compare different brokers based on the level of customer service they offer to their customers. Go with a broker that offers responsive customer service, live chat, and phone-based customer services for a hassle-free trading experience.


  • Security: Choose a broker that uses robust and innovative security technologies to safeguard customers' trading accounts. While most brokers provide two-factor authentication, some offer advanced levels of security protection to offer enhanced protection to customers.





20. How Are Dividend Stocks Taxed?


Dividend stocks are taxable. However, the rate at which you are taxed depends on how long you have held the stock and the account type. Your tax return includes both qualified and unqualified dividends.


However, they are treated differently for tax purposes:



  • Qualified Dividend: The dividend is qualified if you have had the stock for 60 or more days before the ex-dividend date. Depending on your income bracket, such dividends are taxed at the long-term capital gains rate of 0%, 15%, or 20%.


  • Unqualified Dividends: These are dividends that the investor doesn't hold for a specific holding period of at least 60 days. Such dividends include dividends from real estate investment trusts, tax-exempt companies, mutual funds investing in fixed-income products, and employee stock option plans. Unqualified dividends are taxed at the short-term capital gains rate. This rate is the same as the tax rate as your regular income and ranges between 10% to 37% based on your income bracket.



21. What To Consider When Buying Dividend Stocks?


Check out the factors below to help you find the right dividend stocks for your investment goals:


  • Whether the company has a history of paying consistent and increasing dividends. 

  • Look at the price-to-earnings ratio or P/E ratio (share price/ earnings per share) to get an idea of what people are willing to invest in each dollar of earnings. It helps investors determine whether a dividend stock is fairly valued when used with dividend yield.

  • The dividend yield of a share is calculated by dividing the annual dividend payments of a stock by its price. While high-dividend stocks can lead to high investment returns, a high dividend yield is not always good. It can be due to a fall in the share price that increases the dividend yield. Look for reputed and fundamentally dividend-paying solid companies that offer a good dividend yield.

  • Also, consider the dividend payout ratio (dividends paid/company's earnings) that shows the 'generosity' of different companies when paying dividends. The lower the dividend payout ratio, the more sustainable a dividend is.

  • Focus on dividend stocks that help you maximise your investment returns. Identify dividend-paying companies that consistently maintain or increase dividend payout even during economic instability.

  • Compare dividend stocks' total return (capital appreciation + dividends paid).

  • Check the history of earnings growth (EPS per share) of dividend stocks to find the best ones that have shown the ability to consistently increase their earnings per share with time and raise their dividend. 



16. Conclusion


Dividends Investing or reinvesting the dividend income can significantly impact your investment portfolio.


Dividend stocks are safer investments due to their steady cash flow, significant market share, and brand awareness. However, you should always examine the risk of any investment instrument before buying it.


A popular way to incorporate dividend investing into a long-term investment plan is to buy a low-cost dividend-yield fund or ETF.



The advice and information on is in general nature and should not be seen as a replacement for independent financial advice. We strongly encourage readers to consult with financial experts regarding their own financial decisions and investments.

Please note that the information presented on is solely for educational purposes. Every individual's financial situation is unique, and the products and services we mention may not suit everyone. We do not provide financial advice, advisory, or brokerage services nor endorse buying or selling specific stocks or securities. It's essential to know that information might have changed since publication and past performance does not guarantee future results.


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