What is a Dividend
You have no doubt heard of dividends in one way or another. If you have been looking into or are already investing, but do you actually know what a dividend is?
What is a dividend? A dividend is what some companies will pay back to their shareholders just for being a shareholder. If a company is producing good profits it will often choose to give back to its shareholders in the form of a dividend.
A dividend is a cash payment you receive as a shareholder. Companies will often pay dividends once they have enough profit after reinvesting back into the company for further growth. The surplus can then be distributed back to its shareholders as either cash or via Dividend reinvestment plans.
Not all companies will pay a dividend though. Some newer companies or those focused on growing as large as they can eg, Amazon. These companies will reinvest all the profits rather than pay a dividend.
Getting a dividend is like a thank you from the company for holding their stock. Dividends can be very powerful and reinvested dividends contribute a lot to the growth of stock markets.
Hopefully that gives you an easy to understand dividend definition.
When are dividends paid
Not all dividends are paid equally. Typically there are 3 payment schedules for dividends.
Most companies in the USA will pay dividends on a quarterly basis, meaning every 3 months. Normally they payout on the same months every quarter and often around the same dates.
However, this is not set in stone. It can and will vary by anything from a few days up to a full month.
Next up is semi-annually, this seems to be more common for UK stocks. Paying out just twice a year. This has the added benefit of you getting a bigger dividend each tome. With the drawback of loosing out on quarterly compounding the dividends.
A lot of UK stocks do payout quarterly as well but I have found at least with most of my holdings they are semi-annual. Likewise, some US stocks payout semi-annually but the majority are quarterly.
Monthly is the next most common in my opinion. Monthly paying dividend stocks are normally REITs or Real Estate Investment Trusts.
REITs have different rules compared to other stocks and must distribute a lot of their profits back to shareholders. Realty Income is a prime example of a monthly paying REIT with 26 years of dividend growth under its belt.
Also, occasionally you will get a special dividend. A special dividend is different in that it does not align with the typical payout schedule. A company may choose to distribute a single special dividend if it has had an exceptional year with regards to profit.
Doing it this way, they can continue with the normal payments without having to raise the dividends going forward.
Once a company chooses to raise a dividend it is expected to keep it that way or raise further. Reducing a dividend is seen as a bad move and a sign the company is in trouble.
Here is an example. We shall take Johnson & Johnson ticker JNJ for this. At the time of writing, Johnson & Johnson are distributing an annual dividend of $4.04 per share
Being a quarterly paying stock however, we must divide this by four to enable us to work out how much we will revive each quarter.
Assuming we have just a single share. We end up with $4.04/4 = $1.01
So we actually get $1.01 per quarter for just holding that single share. The share price is currently $148.29 giving us a dividend yield of 2.72%.
Seeing as we are in the UK we must pay a 15% withholding tax (as its a US stock) if you are not in the UK then you can check your country in the list. Trading 212 handles this for us by making us sign a W8-BEN on sign up. Don’t worry its just a few clicks. It does not need to printed out and sent anywhere.
Trading 212 Dividend Investing can be a great way to start making your money work for you.
Are dividends taxed
They can be. Having your portfolio inside an ISA will protect you from taxation on UK stock entirely. You need to know the difference between Trading 212 Invest vs ISA accounts.
Having an ISA will not only protect you from paying any tax on your UK dividends it will protect you from any capital gains tax as well.
Many companies, especially in the USA, have a long history of increasing their dividends. It’s like us getting a pay rise every year for doing nothing but holding the stock. This outweighs the withholding tax on US stock to a degree.
Unfortunately, UK investors are hit with the 15% withholding tax but you would be silly to let this bother you. US stock should be the backbone of all portfolios.
Having some strong UK stocks to help offset the 15% tax on the US stocks is a great idea. Dividends are a pretty safe bet. If you invest in solid companies with a strong history of dividend growth, you can expect your dividends to be paid for many years to come.
Most investors will shoot for an average weighted dividend yield of around 4% on their portfolio. This is a reasonable number. Others who have more risk tolerance may go for around 6-7%.
Investors with little appetite for risk may have balanced their portfolios to give a 2.5-3.5% yield.
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None of the above should be used as financial advice, I am not a professional. Always do your own research.