What are Dividends and How Can You Implement Them in your Investment Strategy

If you’re interested in the stock market, you may have come across the term dividends. While quite common in the financial world, the concept of dividends and how to utilize them for investment on a trading platform could be somewhat elusive. This blog post will help you to better understand what dividends are, which companies offer them, when they are paid, and how to potentially use them for your advantage.

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Dividends are essentially a way of rewarding stockholders for their partial ownership of a company. Each stockholder has a certain share of the publicly-traded company, and therefore, is entitled to a portion of its profits. While some companies do not pay steady dividends and prefer reinvesting profits in other company ventures, well-established companies usually pay out dividends on a quarterly, bi-yearly or yearly basis. 

Dividends are given based on each shareholder’s stake in the company, offering them a certain amount of cash or stock per each share they own. For example, if Apple announces a Dividend of $0.8 per share, a stockholder with 50 shares will receive an $40 dividend.

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Cashing in on Dividends

Over the years, a growing number of investors have given attention to dividends. After all, investing in dividend-yielding stocks offer two paths for potential profit: Capital Gains via Stock price increase and dividend yields. Therefore, many investors who have a low-risk appetite, and are looking for long-term growth, base at least some of their stock portfolio on dividend-yielding stocks.

Companies usually announce dividend payouts as part of their earnings reports. The company will specify exactly how much it will pay per share and the date in which the dividends will be realised. While dividends are usually derived from company profits, some companies choose to pay dividends even during times of loss, to retain their existing investors. 

Dividend-Driven Investment Strategies

When looking at a large, successful company’s chart, investors often check for percentage-growth in stock price. However, long-term investors will also look at regular dividend payouts as a means of generating a steady income. 

To give investors who suit the dividend-seeking profile a ready-made solution, eToro has created the DividendGrowth Portfolio. This investment strategy focuses on mature companies that have a track record of at least 20 years of regular dividend payouts. After creating a pool of such companies, the portfolio is further optimised, using the following criteria:

  • Market cap – looking for solid companies.
  • Beta – low market volatility.
  • 5-year dividend growth average – looking at consistency over the medium term.
  • Previous year dividend yield –  short term dividend performance.

The resulting portfolio presents a well-rounded, long-term and low-risk investment solution for dividend-hungry investors. Some of the stocks within the Portfolio at launch include Pepsico, IBM, Coca-Cola, 3M, McDonald’s and many others

If you wish to follow the performance of the DividendGrowth Portfolio, add it to your watchlist today

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Smart Portfolios™ is a portfolio management product. Smart Portfolios should not be considered as exchange-traded funds, nor as hedge funds.