Dividend investing has become very popular over recent years. In fact, dividend stocks now account for nearly half of all publicly traded U.S. equities. The reason why investors love dividends is because they provide consistent cash flow without having to worry about share price fluctuations.

You don't have to wait until retirement to start earning income from dividends. There are plenty of companies that pay out regular dividends every single month or quarter. All you need to do is look at their financial statements and see whether or not they're paying out enough to cover your costs.

In today's post I will be covering why dividend investing is a great strategy for many people. I will also be covering how you can make over £1000 per month with dividends. Stick around to see examples.

How Dividend Stocks Work

A dividend is a payment made by a corporation to its shareholders. Companies usually announce dividends during earnings calls or filing with the Securities and Exchange Commission.

Investors need to know what the dividend payout percentage is before buying shares. Some companies pay out 95% of profits while others pay out 5%.

There are many different ways companies determine how much to pay out per quarter. For example, some companies pay out a fixed amount based on the number of outstanding shares. Others use a formula that takes into account the price of the stock, the number of outstanding shares, and the historical average yield for the industry.

When an investor buys shares after the ex-dividend date, he or she won't receive any dividend payments until after the next record date. Investors should pay close attention to the ex-dividend dates before making purchases.

What Is the Dividend Yield?

A higher stock price does not necessarily translate into a higher dividend yield. In fact, some stocks pay no dividends while others pay high dividends. Companies do this because it makes sense for them. Some companies prefer to use cash flow rather than earnings to distribute money to shareholders. Others believe that paying dividends dilutes their brand image. 

The best way to find out about a company’s dividend history is to check out their financial statements. You can find them online. They show you where the company earns revenue, spends money, and distributes profits. You can see how much money the company earned, spent, and distributed over the previous 12 months. If you don’t understand the numbers, ask someone who does.

You can calculate the dividend yield by dividing the amount of dividends paid by the current market value of the company. This gives you the percentage of dividends paid out of the total worth of the company. So, if a company had a market value of $100 billion and paid out $2 billion in dividends each year, the dividend yield would be 2%.

If you buy a stock just because it has a high dividend yield, you could lose money if the company goes bankrupt. A high dividend yield may seem good at first, but if the company can't sustain paying out the high dividend yield along with running the business, then the dividend will likely be cut. Or worse, the company may go bankrupt.

Using this information we are able to work out exactly what it takes to make £1000 per month. So to start we want the yearly earnings which would be £12000 (ignoring tax calculations for this). 

Then using your dividend yield you can find out how much is needed to reach the £12000 per year. Let's say we have a 1% dividend per share. That means our £12000 is the 1% we would receive from the stock in question. To go from 1% to 100% which would be the total investment we multiply the value by 100. 

Doing that to the £12000 gives us £1,200,000

If you are using any other values to workout this number then use the formula below

(Desired Annual Wage / Dividend Yield ) * 100 = Total Investment Required

Taxes on Dividends

In the UK, dividends are taxed depending on your income bracet. Meaning if you earn a lot of money, then you will be expected to pay more in taxes on your dividends. To learn more about dividend taxes checkout my blog post below:

https://portfolio-hub.co.uk/blog/66/do-dividends-count-as-income-uk

Examples of Dividend Stocks

To help give you an idea of some dividend stocks you may be interested in, I have included a list of dividend stocks below. The list is in no particular order and values are taken at the time of writing this so dividend yields may have changed by the time you are reading this:

• PepsiCo ($PEP): 2.7% dividend yield
• 3M Company ($MMM): 4.90% dividend yield
• AT&T Inc. ($T): 6.46% dividend yield
• General Electric Company ($GE): 0.44% dividend yield
• Coca Cola Company ($KO): 2.88% dividend yield
• Walmart ($WMT): 1.68% dividend yield
• Procter & Gamble ($PG): 2.66% dividend yield

https://portfolio-hub.co.uk/blog/30/top-10-uk-dividend-stocks-in-2022

Dividend investment strategies

A dividend portfolio is an effective strategy for building wealth over time. A dividend portfolio allows investors to benefit from the steady flow of income that companies distribute to shareholders each year. Companies use dividends to reward shareholders for supporting the company through good times and bad.

Pay attention to a company's long term growth prospects before making a final decision about whether or not it makes sense to invest. You want to make sure that a company is growing because it is profitable and not just because it is having trouble paying down debt.

There are many different types of dividend investing strategies to choose among. Some people prefer to focus on high yielders while others like to look for value. If you're looking for a low cost approach, consider index funds. They track broad market benchmarks such as the S&P 500. Index funds charge very little in fees, but they do not actively manage the fund. This means that there is no human intervention involved in picking which securities to include in the fund. Instead, the fund manager simply buys and sells securities based on what the benchmark tells him to do.

Mutual funds are another option. Like index funds, they are passive investment vehicles that track indexes. However, mutual funds typically have higher expense ratios than index funds. These expenses are paid by shareholders in the form of higher fees. In addition, some mutual funds require sales charges to sell shares.

Both ETFs and mutual funds offer diversification and lower risk than holding individual securities. By owning both an S&P 500 index fund and a technology stock ETF, you can gain exposure to the overall performance of the market without worrying about specific sectors.

How To Find Success With Dividends

Dividend investing offers a great way to grow wealth over time. However, if you want to find success with dividend investing, then there are a few bit's you should know

Invest In Dividends With A Good History

Companies with high dividend yields often pay out dividends quarterly. This makes sense because companies want to keep investors happy and retain customers. However, paying out dividends every quarter also limits how much money a company can invest in growth. If a company doesn't increase its dividend, it could eventually stop growing its dividend altogether.

When investing in stocks with high yield, it's important to look beyond just the current yield. Investors should consider whether the company will likely maintain its high yield over time. Companies like Apple Inc., Berkshire Hathaway Inc., and Exxon Mobil Corp. have maintained their high yields over long periods of time. While some companies struggle to maintain their high yields, others are able to do so without sacrificing their competitive edge.

Reinvest Your Dividends

The best way to invest for growth is to reinvest dividends into more shares. This strategy allows you to build wealth over the long haul without sacrificing current income. If you reinvest your dividends, you'll earn even greater returns over time.

According to Morningstar, dividend stocks outperformed both the S&P 500 and the Russell 2000 Index by nearly 3 percentage points per annum over the trailing 10-year period ending December 31, 2018.

Avoid the highest yields

When you buy shares of stock, it’s important to avoid the highest yield. This is because high yields are usually associated with low share prices. If you do decide to purchase a stock that has a high yield, make sure you understand what the yield represents. You want to know how much money you’re getting paid for holding onto the stock.

You don't want to purchase a stock because of a high yield only to find out the yield only seems high because of recent stock decline leading to a companies downfall.

Buy and hold for the long term

Warren Buffett once famously said, "You don't find many people who buy what they sell." A lot of investors take his advice to heart, buying shares of companies whose products and services they use every day, like Apple, Amazon, and Facebook.

If you sit on these companies for the long term and they continue to do well, then you can grow your wealth many times over a life time.

Summary

Dividends make sense when you want to invest for the long term. They allow you to build wealth slowly but steadily, which makes them an excellent choice for retirement. But they aren't always right for everyone. Before you dive headfirst into dividend investing, do your research and ask yourself whether or not it's right for you.

I am not a financial advisor and anything I say in my blog is not to be taken as financial advise. For any financial advise please contact a financial professional. My blog is based on my own opinions, research and understanding of the financial markets.

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Thanks for reading

FAQ

How Dividend Investing Works

Some companies may have a dividend reinvestment plan, often called "DRIP." With a DRIP, you can choose to reinvest your dividends to buy more shares instead of taking them as cash. This can be a wise plan when your dividends are small, either because the company is growing or because you don't own much stock.

Source: thebalance.com

What are dividend stocks?

Dividend stocks distribute a portion of the company's earnings to investors on a regular basis. Most American dividend stocks pay investors a set amount each quarter, and the top ones increase their payouts over time, so investors can build an annuity-like cash stream. (Investors can also choose to reinvest dividends if they don't need the stream of income. Here's more about dividends and how they work.)

Source: nerdwallet.com

How often dividends are paid?

Most companies pay out quarterly or even twice a year. Some even pay out monthly. Any dividend payments made throughout the year are referred to as interim dividends. At the end of the year, the last payment will be called a final dividend. Ultimately the payment schedule will vary based on the company. The total dividend yield will still be the same. The payment will just be spread out over the payment schedule with the final dividend typically being the largest payment.

Source: islamicfinanceguru.com