14 April 2011

Is dividend important to your investment?

From my previous post Dividend - another source of passive income I have elaborated the importance of dividend to be part of our passive income streams. Dividend is a form of returns which company appreciates the shareholders for holding their shares for a certain period. Some company may pay the dividend in quarterly basis, some in half yearly basis and some in yearly basis. There is sometime where company will distribute special dividend to us on the back of fantastic returns for certain good  period.

However, we must also understand the instability of the dividend streams as well as company dividend policy. Some companies distribute the dividend based on certain percentage of the earnings earned for previous year. For example, if a company earns 10cents per year, and its dividend policy is at least 40% of earnings, then you will get 4 cents in returns. Some companies distribute based on capital budgeting policy. If they find a good investment opportunities, they will keep the money and invest in those investments which will give higher potential returns in future.

Some dividends are 'tax exempted', which means you do no need to pay for tax for those dividend income. In this case, you can treat dividend as a business which does not require you to pay the tax.

After company distributes the dividend to the shareholders, normally the stock price will drop accordingly to the dividend distributed. However, the company shares price will
returns to its normal price in long run.

How dividend important to your investment?

For investors who prefer stable money flow, dividend is important to you. You can invest in REITs or companies which distributes dividend in constant & regular basis regardless of the business cycle such as those consumer stocks.

Some investors do not care about dividend and they concentrate on capital gain.


For another type of investor, they would prefer high growth stocks, which will not give them dividends but fully investing in future and hoping the share prices will rise according to the earnings earned by the company in future.



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