This article will cover my thoughts around dividend focused investing. Should dividends be taken into consideration when buying stocks?
What is a dividend?
Firstly, a dividend is a regular payout from a share, ETF or investment to it’s shareholders. This usually happens yearly, biyearly or more frequently depending on your investment.
These payouts are usually from a surplus of profits a business has made and has ‘no real use for’. Meaning, that they’ve already allocated budget to R&D, marketing, expenses, debt etc. (This may differ from the type of investment)
The amount you receive is relative to the amount of shares you hold. Read the full dividends breakdown by Investopedia.com.
Should I buy only dividend paying stocks?
TL;DR – No, this should not be a show stopper when choosing a business to invest in.
Well getting paid out a dividend is always nice, and I’m changing my Tax Free Savings investment to be more dividend focused as it aligns with my long term retirement goal of stockpiling shares and ETF’s I believe in. Read my investment strategy.
Now, it’s not crucial to invest in a stock or ETF that pays dividends – often companies that don’t pay dividends reinvest that surplus of cash back into the business to accelerate it’s growth and ultimately increase it’s share price.
Would you rather have a dividend paying business, and it’s share value stays stagnant or a non-dividend paying business that share price increases over 15% (minimum) year over year?
Not all dividend paying businesses or ETF’s are bad, but it should not be the main reason you’re buying shares – people tend to ‘sell’ dividend paying shares are superior than shares that don’t.
As mentioned above, dividends are calculated based on how many shares you hold at the time of the payout. The more you hold the better your dividend amount will be. Be aware that dividends are taxed (well at least here in South Africa they are), but thanks to Tax Free Savings they are exempted from tax deductions as long as they are in your Tax Free Savings Account/Portfolio. The dividend payout is usually a small portion compared to the share price and won’t be a 1-1 payout. For example 10 shares at R10 gives you a dividend of R10 per share – it’s usually around R0.50c per share for example, so be sure to rack up those shares when the price is right.
My goto ETF for dividends, which I’m keeping an eye on is the Coreshares – Total World ETF.
Happy Investing! 🚀