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:
The value of dividend investing
What is a dividend?
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.
Types of dividends
Dividends come in different forms, such as:
Cash dividend
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.
Stock dividend
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.
What is dividend yield?
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.
The value of dividend investing
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.
The pros and cons of dividend investing
Pros
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Dividends offer an income source, which you can spend or reinvest
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Reinvesting your dividends can lead to compound growth
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Dividend stocks can be less risky than other types of investments
Cons
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Companies that pay high dividends may have slower growth
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Companies can decide to stop or reduce their dividend payments
Key takeaways on dividend investing
Here are some ways to get the most out of investing in dividend stocks:
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Reinvest your dividends: Use your dividends to buy more shares and benefit from the power of compounding
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Do your research: Look for reliable companies with a strong record of paying dividends, especially ones that have raised their dividends over time
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Diversify: Spread your investments across different sectors, to protect your income
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Consider your goals: Think about what you need your dividend income for, such as income now or reinvesting for future growth
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.
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This article is published by HSBC Bank Middle East Limited ("HBME") – UAE Branch, P.O. Box 66, Dubai, UAE, which is regulated by the Central Bank of the UAE and lead regulated by the Dubai Financial Services Authority. In respect of certain financial services and activities offered by HBME, it is regulated by the Capital Market Authority in the UAE under licence number 602004.
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