One of the many great benefits of owning some shares in the stock market is exactly that. You become part owner of a company you believe in and in return you get treated like one. Although owning one share in for example $AAPL won’t give you rights into choosing what iPhone you make next, you do get exposure into a share of the profits. Some companies reward their shareholders in the form of Dividends. Dividends are a great way to add on to your income or even make a separate stream of income. You don’t have to work for this money, and you don’t have to make executive decisions for this money either. Dividends are completely passive, and they get paid 4 times a year. Some companies even pay monthly. Keep in mind that not all companies pay dividends and not all of them are obligated to keep paying out that dividend. Another downside is that you are taxed on dividends whether you use the money or not. Having a small dividend portfolio could be a great addition to your current portfolio, and over time it could even grow so big that it could supplement some of your income.

Finding Dividend Paying Stocks

One of the best ways to start is by finding a great company to invest in. You can do simple research on your favorite companies on any finance website in this example I will use Yahoo Finance. Let’s say I wanted to know if Coca-Cola $KO company paid a dividend. I would search up the companies name or ticker symbol and it would bring up a ton of information. They key item I am looking for is if it pays a dividend. The box labeled “Forward Dividend & Yield” and the number at the time of writing this was 1.84 (3.02%). This is the yearly dividend for the Coca-Cola company. Although a measly dollar is nothing to scoff at. This is on a per share basis. So every share of Coca-Cola company you buy will result in an extra $1.84 a year. The 3.02% yield is based on the current share price. ($1.84 / $60.90/share).

Dividend Yield vs Yield on Cost

In the example above the Dividend Yield was calculated by dividing the annual dividend by the current share price. A yield on cost is different. Once you buy the share you lock in at a certain price. Let’s say for example the share went up to $80. This would make the current Yield 2.3% ($1.84 / $80). Although you bought in at $60.90 this would keep your Yield on cost at 3.02%. Likewise if the dividend goes up to $2.00. ($2.00 / 60.90) this would make your yield on cost go up to 3.28%. This is just another advantage of dividend investing. Whether the share price goes up or down, you are always going to get paid that dividend.

EX-Dividend date

You must own shares on or before this date to be qualified for a dividend. In the example above the date was Jun 15, 2023. If you bought shares after Jun 15th you would not receive a dividend on the next quarter. You would have to wait until the next Ex-Dividend date to receive your quarterly dividend.

Dividend ETFs and Aristocrats

If you’re having a hard time deciding between companies, ETFs that pay dividends also exist. It’s the same thing except this fund owns many shares of different dividend paying stocks. This ETF will also have it’s own dividend ratio and payout. There is also a list called dividend aristocrats, which is a list of dividend paying stocks that have consecutively increased their dividend payouts over the past 25 years. Although past performance doesn’t guarantee future performance, this list is a good basis because it shows which companies prefer to reward their shareholders and do so on a consistent basis.

Reinvesting Dividends (DRIP)

Some brokerages will allow you to automatically reinvest your dividends. This plan is called DRIP which is Dividend Reinvestment Plan. Using this service is free and allows your dividends to compound. Keep in mind even though you reinvest your dividends, you still have to pay taxes on all earned dividends. Even if you reinvest them to the same company. This is a great method to just keep your money growing without worrying too much on dividend payment dates.

REITs

REITs or Real Estate Investment Trusts are traded on the stock market but work a little differently from stocks. These companies own and manage real estate. Although they manage and own all the physical real estate they are required to pay out 90% of their profits in the form of dividends. These dividends are also taxed differently they are called Ordinary Dividends which are taxed at your regular income tax rate.

Ordinary Dividends vs Qualified Dividends

There are two types of dividends. Ordinary dividends which are taxed at your regular rate of income. These can be from REITs or from owning shares for too short of time, less than 60 days before the Ex-Dividend date. There are certain rules in the IRS which dictate when a dividend becomes qualified. Most US companies will result in Qualified Dividends which results in a lowered (capital gains) tax rate.

Bottom Line

Investing for dividends is really easy, and it’s a great way to add a little income. Combining this with DRIP and using dividend aristocrats can also result in a “dividend snowball” which over time will only grow your dividends. This in the future can be used to supplement your income without selling any shares. Just don’t forget to pay your taxes 🙂

Thank you for reading and I’ll see you next Sunday,
– Pablo