How to get the most out of dividend investing

Investing in stocks and funds is one thing, but actively getting the most out of them can make a big difference to your portfolio and your financial future. 

Here we cover:

What is a dividend? 

Types of dividends

What is dividend yield? 

The value of dividend investing 

The pros and cons of dividend investing

Key takeaways on dividend investing

A dividend is a slice of post-tax profit a company pays out to its shareholders as a reward for their investment. 

For shareholders, a regular dividend payment can be seen as one of the ways to decide whether a company is healthy and is a good investment.

Not all companies pay dividends, and they’re only likely to pay a dividend if they’ve made a profit that year.

Dividends come in different forms, such as:

The company you’ve invested in can pay a cash dividend directly into your account. This can be useful as an extra income stream.

Cash dividends are either paid as a final dividend at the end of the financial year, or as an interim dividend during the year.

You may be offered the option of extra shares in the company instead of cash. This is also known as a bonus issue. 

Stock dividends allow you to benefit from automatic dividend reinvestment. This means compound interest works in your favour. You get more shares and, potentially, more dividend payments from them in future.

Dividend yield is a percentage that shows you how much income you get compared to the current market price. Here’s a dividend yield formula:

For example, if a company pays an annual dividend of AED 5 per share, and the share price is AED 100, the dividend yield will be 5%. 

Bear in mind that a high dividend yield may not always be a good thing. If a company’s shares drop for some reason, the yield may look artificially high. So it’s worth doing some more research into whether a company is likely to grow and be able to pay a dividend over time. 

You can also use dividend per share to track performance. This tells you how much you earn for each share you own.

Maximising your dividend value can help you get more for your money and boost your wealth.

Dividend investing means choosing the right companies to invest in and actively managing your dividend payments, such as reinvesting them. For instance, you could do it yourself or check if a company has a dividend reinvestment plan (DRIP) which automatically does it for you.

Companies that regularly pay and increase their dividends are known as dividend growth stocks. They usually have strong finances and are well managed. 

Explore: How to invest in stocks and shares

When looking for the best dividend stocks in the UAE, think about established companies with a good record of dividend payments and strong cash flow. Government support or ownership can also offer security. An added benefit is that taxes on dividends are lower in the UAE compared to many other countries. 

Also consider diversifying your investments across different asset classes to build a portfolio with shock absorbers. 

“Diversification spreads your money across assets that don’t move in lockstep, so when one wheel dips another may rise. The portfolio sways less yet still aims for its full return potential,” says Willem Sels, Global Chief Investment Officer, HSBC Private Bank and Premier Wealth.

Here are some ways to get the most out of investing in dividend stocks:

By using these tips, you can make your dividends work for you, either by building a steady income stream or by growing your wealth for the years ahead.