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.
If you still need a trading account to buy dividend stocks, consider eToro, which is used by many investors in Australia and worldwide. You can create an eToro trading account HERE.
The trading platform offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders.
Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees apply.
eToro Service ARSN 637 489 466 promoted by eToro AUS Capital Limited ACN 612 791 803 AFSL 491139. Capital at risk. See PDS and TMD. Zero commission does not apply to short or leveraged positions. Zero commission means that no broker fee has been charged when opening or closing the position. Limited stock exchanges only.
1. What Are Dividends?
Dividends represent a portion of a company's profits or earnings distributed to its investors. Typically, companies 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 allure them to more investment.
Dividends are more than just beneficial for shareholders. They also 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 they pay (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 spend every quarter (i.e., once after 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:
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 with a trading platform that lets you invest in dividends 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.
If you still need a trading account to buy dividend stocks, consider eToro, which is used by many investors in Australia and worldwide. You can create an eToro trading account HERE.
eToro Service ARSN 637 489 466 promoted by eToro AUS Capital Limited ACN 612 791 803 AFSL 491139. Capital at risk. See PDS and TMD. Zero commission does not apply to short or leveraged positions. Zero commission means that no broker fee has been charged when opening or closing the position. Limited stock exchanges only.
eToro also offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders, which is perfect for beginners.
Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees apply.
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 right away?
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 their balance sheet, including cash reserves, debt, and other assets and liabilities, to determine how reliable and profitable a company is. Also, check whether they pay dividends consistently and on time, follow a progressive dividend strategy, and regularly increase their 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. It would be best to decide what per cent 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 bank account of the stockholders. There is also an option to reinvest the dividend income into the market. It is called Dividend Re-Investment Plan or "DRIP".
Some Australian brokers offer a feature wherein investors can automatically set up DRIP to reinvest their dividend amount to buy 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
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 is beneficial for 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
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 where every dividend received is reinvested into the company at no extra fees/ commission. It 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.
eToro is one of the leading stock brokers that charge zero brokerage for stock trading.
The trading platform is bundled with extensive trading features, social trading tools, and copy trading facility to imitate the trades of other famous traders. You can create an eToro trading account HERE.
eToro Service ARSN 637 489 466 promoted by eToro AUS Capital Limited ACN 612 791 803 AFSL 491139. Capital at risk. See PDS and TMD. Zero commission does not apply to short or leveraged positions. Zero commission means that no broker fee has been charged when opening or closing the position. Limited stock exchanges only.
Furthermore, the platform also provides fractional share trading and conditional orders to its investors.
Here is a comparison of popularly used stock brokers in Australia:
(eToro Service ARSN 637 489 466 Capital at risk. See PDS and TMD)
Stock Broker Name | Price Per Trade | Inactivity Fee | Markets Served | International |
$0 |
US$10 per month if there’s been no log-in for 12 months |
ASX & Global shares, US shares, ETFs |
Yes |
|
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 |
Yes |
|
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 hedge against inflation more effectively than bonds.
Investors seeking wealth creation over the long term 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, beneficial when the market is down.
Dividends offer a good hedge against inflation when they increase over time. Dividends can also come franked and provide specific tax benefits to shareholders. It makes 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 provide stock price support 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:
20. How Are Dividend Stocks Taxed?
Dividend stocks are taxable. However, the rate at which you are taxed depends on how long you have been holding the stock and the account type the dividend stocks are in. Your tax return includes both qualified and unqualified dividends.
However, they are treated differently for tax purposes:
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 for 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.
22. Frequently Asked Questions (FAQs)
What Are The Most Popular Dividend Stocks In Australia?
Here is the list of the most popular Australian dividend shares to buy (along with their codes on ASX).
Garage Resources (GRR)
GR Engineering Services Ltd. (GNG)
Fortescue Metals Group Ltd (FMG)
Southern Cross Electrical Engineering Ltd. (SXE)
Magellan Financial Group Ltd (MFG)
Lycopodium Ltd (LYL)
RIO Tinto Ltd. (RIO)
Anglogold Ashanti Ltd (AGG)
Macmahon Holdings Ltd (MAH)
Gale Pacific Ltd (GAP)
Globe International Ltd (GLB)
NRW Holdings Ltd (NWH)
JB Hi-Fi Ltd (JBH)
Woodside Petroleum Ltd (WPL)
Regis Resources Ltd (RRL)
Smartgroup Corporation Ltd (SIQ)
Engenco Ltd (EGN)
Elders Ltd (ELD)
XRF Scientific Ltd (XRF) Tabcorp Holdings Ltd. (TAH)
FSA Group Ltd (FSA)
Ambertech Ltd. (AMO)
Yancoal Australia Ltd. (YAL)
BHP Group Ltd. (BHP)
Platinum Asset Management Ltd. (PTM)
Medusa Mining Ltd. (MML)
Bisalloy Steel Group Ltd. (BIS)
Cornado Global Resources Inc (CRN)
What Are The Best Dividend Stocks of All Time?
Dividend aristocrats are companies with a long track record of continuous dividend growth for over 25 consecutive years, even in the past monetary crisis.
Around 65 dividend aristocrat companies are listed on the S&P 500 market index as of August 2022.
Some of these more substantial companies with consistent growth include:
McDonald’s
Walmart
PepsiCo
Target
International Business Machines
Coca-Cola
Illinois Tool Works
Expeditors International of Washington
Is Investing In Dividend Shares Worthwhile?
Dividends are usually a sign of the financial health of a company.
They are an excellent way to supplement your pension with an added passive income. These payments help boost portfolio returns during a share market crash or correction. Investors can use this income either for reinvestment or personal use.
Unlike growth stocks, dividend-paying stocks provide returns to shareholders even during market volatility if you choose the right stock. If you choose the wrong stocks, you could always lose your money.
If a company suddenly decides that it no longer pays dividends due to a decline in profit, you could lose the dividend payments and investment value in the form of a decline in share price.
Your gains from investing in dividend shares depend on your investment approach and temperament. Investing in high-yield and established blue-chip companies with good dividend payouts can stabilise your portfolio under unfavourable market conditions.
It helps cushion drops in share prices and allows price appreciation with a consistent income stream from dividends.
However, even though dividend investing may be less risky than other forms of investing, there is always the risk of losing your money if you pick the wrong stocks or the market conditions change unfavourably.
What Are The Risks of Investing In Dividend Shares?
When the company reduces its yield, investors who have entered the stock with the same objective start to sell, and the selling pressure causes the share price to fall. The trapped investors have to exit the stock with a heavy loss.
What Are Franking Credits?
The Australian Taxation Office (ATO) considers dividend payments as personal income. Due to this, investors need to declare the dividend income they receive in a financial year when filing their yearly tax returns.
Franking credits are an excellent way to reduce tax liability. The Australian government has implemented the franking system to ensure dividend payments are taxed only once a year.
Shareholders receive their dividend payment and an acknowledgement that the company has already paid the tax to the government.
This acknowledgement is referred to as a franking credit. Investors with no taxable income can receive these credits through a cash refund.
What Things Do You Need To Pay Attention When You Invest In Dividends Stocks?
Here are a few things to watch out for before you start your dividend-investing journey:
How Does A Dividend Stock Differ From A Dividend Fund?
A dividend stock is a publicly traded company that makes dividend payments regularly. On the other hand, a dividend-focused mutual fund, or Electronic traded fund (ETF), is a bundle of several dividend-paying stocks.
Dividend ETFs or index funds offer access to an array of dividend stocks in a single investment. This implies that you can own a portfolio of dividend stocks in just a single transaction. The fund pays out dividends regularly, which you can reinvest to amplify your profits.
The advantage of choosing a dividend fund over a dividend stock is that you will spread your risk across various companies. It will help instead of picking only a few individual stocks based on your analysis. Thus, dividend funds give you the benefit of generating passive income and also helps minimise risks through diversification.
Buying a dividend fund is a good idea for beginner investors looking for a safer approach to make an attractive investment. On the other hand, experienced investors who like researching companies can achieve higher returns by identifying and investing in a few companies they know and understand well.
What Are Some Famous Long-Term Dividend Stocks In Australia?
Here is a list of famous Australian dividend-paying blue-chip shares:
Coronado Global Resources (ASX: CRN)
Amcor (ASX: AMC)
Deterra Royalties (ASX: DRR)
Bank of Queensland (ASX: BOQ)
Scentre Group (ASX: SCG)
Pepper Money (ASX: PPM)
What Industries Offer A Higher Dividend To Their Shareholders?
Companies that operate in the following sectors offer higher dividends to their shareholders:
Telecom
Consumer Staples
Utilities
Energy (oil and gas)
Banks and Financial Institutions
Healthcare and Pharmaceuticals
How Are Dividends Taxed?
The dividend stocks tax depends on two factors:
To save yourself from the additional tax burden, you can hold your stocks or funds in a tax-advantaged retirement plan like a traditional or Roth Individual Retirement Account. In this case, you would not have to pay taxes on the realized gains or dividends.
When Should You Buy Dividend Stocks?
Many people wrongly think that dividend stocks are only for those who don't like taking risks or for people who have stopped working. But the best time to buy stocks that pay dividends is when you start investing. This way, you can enjoy their advantages for a long time.
However, you need to be selective when buying dividend stocks. Only invest in companies that have historically outperformed the market, consistently increased their dividends, and have less volatility or "beta."
Such dividend stocks are perfect for almost all investors and help build a diversified wealth-building portfolio.
Are Dividend Stocks a Volatile Investment?
The overall increase and decrease of the markets influence dividend stocks. They tend to be less volatile compared to non-dividend stocks.
It is because dividend stock investors tend to buy and hold stocks to generate passive income instead of actively trading in them.
Can You Live off Dividends in Australia?
Yes. Funding your lifestyle through dividends is possible. To live solely on dividends, you must invest early and reinvest dividends during the accumulation phase for the gains to compound.
You should strongly consider reinvesting your dividends into your portfolio rather than spending them. This way, you will benefit from compounding returns (earning returns on both your principal and reinvested dividends).
As you accumulate greater returns over time, you will build a more extensive portfolio, making it possible to live off dividends alone.
Is Investing in Dividend Stocks A Good Idea?
Yes and No. Investing in dividend stocks is a good idea as they are less volatile and provide a hedge against inflation. You not only earn from dividend payments but also from capital appreciation.
By dividend investing, your total return can add up over time. It could become a large sum to meet your long-term financial goals.
However, not every dividend stock is ideal for investment, especially those that offer abnormally high dividend yields. Inexperienced investors often make the mistake of investing in the highest dividend-yield stocks and fall into the dividend-yield trap.
In some cases, a high dividend yield is due to a significant reduction in the stock price. Investment in such dividend stocks solely for the gain of dividends is not a wise decision. Steer clear of those companies as there is no surety that the company will be capable of maintaining dividend payouts in the future.
Instead, dividend investors should look for well-regarded dividend-paying companies with a history of consistently increasing dividends and promising future outlooks.
Also, not every dividend-paying stock maintains a dividend payout in each economic environment. A diversified portfolio of dividend stocks is recommended to generate a steady income stream.
Thus, dividend stocks can generate good returns on your investment, provided that you make the proper stock selection, diversify your investment portfolio, reinvest dividends, and stay invested long-term.
How Long Do You Need To Hold a Stock To Get Dividends?
Generally, you should buy shares at least one day before the ex-dividend date to be eligible to receive dividends.
It is also necessary to have held the share for over 60 days before the ex-dividend date for the dividend to be "qualified."
How Often are Dividends Distributed to Shareholders?
Usually, companies pay dividends monthly, quarterly, or annually in the form of cash, additional stock, or dividend reinvestments.
Companies may even offer special dividends if their stock performs exceptionally well or after they receive a big windfall.
Do ETFs Pay Dividends?
Yes, Investors can invest in an ETF that comprises dividend-paying stocks. ETF dividends are usually paid quarterly, but some companies pay them monthly. Qualified dividends are taxed at the long-term capital gains rate.
On the other hand, nonqualified dividends are subject to taxation at the investor's regular income tax rate.
What Are The Downsides of Dividend Stocks?
Like any investment, investment in dividend stocks also has some drawbacks:
Some tips to avoid falling for a yield trap:
Avoid buying stocks based only on dividend yield. Compare the dividend yield of a company with its peers. If it is significantly higher, it is primarily a red flag, not an opportunity. Buying a rock-solid dividend stock with a lower yield is better than running after a high-yield stock that may prove illusory.
Use the payout ratios to assess the sustainability of a dividend.
Check the company's dividend yield, dividend history, and payout growth to assess its profitability and the ability to raise its stock dividend.
Always study the company's balance sheet, including cash flow, debt, and other assets and liabilities. It will help you understand its financial condition and whether it can maintain its dividend payout in the future.
Understand the company's business and industry and check whether the company is at risk due to weak demand or any other reason.
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 as part of your long-term investment plan is by buying a low-cost dividend-yield fund or ETF.
If you still need a trading account to buy dividend stocks, consider eToro, which is used by many investors in Australia and worldwide. You can create an eToro trading account HERE.
eToro Service ARSN 637 489 466 promoted by eToro AUS Capital Limited ACN 612 791 803 AFSL 491139. Capital at risk. See PDS and TMD. Zero commission does not apply to short or leveraged positions. Zero commission means that no broker fee has been charged when opening or closing the position. Limited stock exchanges only.
The advice and information on OzStudies.com 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 OzStudies.com 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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