I am not a financial advisor. This post is to provide information and not provide financial product advice. I discuss why I personally chose to invest in the financial product and also share information that is public about the following financial product.
It is recommended that you should always consider visiting a financial advisor for independent financial advice before making decisions.
So, a lot of people on social media who are now getting involved with investing are wondering “why are people talk about investing in high dividend stocks, ETFs or REITs?”.
So, first, let’s talk about… What is a dividend?
So, what is a Dividend?
A dividend is a distribution of some of a company’s earnings to a class of its shareholders.
Let’s take a look at the above diagram and if you buy 1 share. The Quarterly Dividend means they pay $1.0225 per quarter, per share. If you hold on to the share for all four quarters, you would earn about $4.09 annually.
So, the more shares you own, the larger your future dividends will be.
So, if the quarterly dividend stays at $1.0225 and you purchase 100 shares, you’ll earn $10.225 quarterly and $40.90 annually.
So, when you buy a share in a stock online, you will be asked if you want to reinvest your dividend back into the same stock or a different stock, it’s up to you.
But its important to note: Dividends are not guaranteed
During the pandemic, there were major companies which cut or suspended its dividend. Some who continued to pay dividends despite the pandemic.
If a company offers a dividend, shows the financial health of a company and how financial healthy they are.
But there are companies who believe in their shareholders and keep their dividends and for many dividend stock investors, they look towards stocks, ETF’s, REITs which pay larger dividends. Some, who look for monthly dividends, instead of quarterly.
Personally, for me, I find companies who offer dividends to be attractive. But I also know that some newer companies (or those who have been around for a few years) don’t typically offer dividends.
I like the dividends and I invest primarily in stocks and ETFs that offer dividends.
What is a Dividend Yield and Why Should I Care?
First, let’s preface with a “Do not just look at a dividend yield”. Do your research of how healthy (and unhealthy) the company is.
So, when you look at a stock for its dividend, while it’s important to see how much it’s paid monthly, quarterly and annually, Let,’s take a look at the Annual Dividend Yield for the following company which is 2.78% and a quarterly dividend is $1.0225 and its current share price is $146.07.
So, let’s take the quarterly dividend of $1.0225 x 4 = $4.10.
Now take the $4.10 annual dividend and divide it from the shareprice of $146.07 which equals a dividend yield of 2.8%.
But what you see one day, may change the day after. You’ll have to keep in track of your share if you do care to track the dividend.
But for those buying for the long-term, keep an eye on your stock’s total return + the yield.
There are many companies that offer a high dividend, but it doesn’t mean anything if their earnings per share is low.
If a company is losing money and their yield is high, that’s not a good sign. From what I’ve read, you want a combination of growth + a higher yield!
But please do your research and read this awesome article from U.S. News and World Report.
About ETF’s that Pay Dividends
Like stocks that pay a dividend per month, per quarter or per year, there are ETF’s that pay dividends as well.
An ETF is an exchange-traded fund, such as investment fund or exchange-traded product. A best way to explain it is to think of an ETF as a basket of stocks. But instead of investing in one full share of stock, you get a % of various stocks called holdings.
So, there are ETF’s that deal with the Financial Sector, the Real Estate Sector, the Industrial Sector, the Healthcare Sector and there are literally hundreds of ETF’s out there which you can invest in.
So, let’s take a look at XHB which is the S&P Homebuilders Select Industry which offers 2 dividends per year, the average dividend paid is $0.12 and has a total holding of 36 companies. It’s not actively managed but has a Gross Expense Ratio and Net Expense Ratio of .35% and is not actively managed.
Gross Expense Ratio includes fee waivers or expense reimbursements, Net Expense Ratio which includes the fund’s management fees and administrative costs.
The attractiveness of dividend paying ETF’s is that they can be much cheaper and less risky. But it’s important to due your research and talk to a financial advisor of your thoughts and plans of what ETF’s you may want to invest in, as some ETF’s can be risky and have a high expense ratio.
Personally, I find myself into ETF’s with low expense ratios. I love ETF’s with a lower gross expense ratio. The lower the ratio means more returns. The higher the ratio, will eat up your return.
For more on Expense Ratios, please check out this article on Investopedia.
Last but not least… Keep an Eye on Your Dividend for Tax Purposes
Yes, you will be taxed the year you receive dividends.
But again, please do your research. Research the stock, ETF, REIT and also join the plethora of dividend stock/ETF groups online. Talk to a financial advisor.
