Dividend payout is the amount of cash that a firm pays to the shareholders for their stock, distributing, this way, the earnings generated during a certain period of time, usually the fiscal year. Generally, a corporation doesn’t transfer all the earnings to the shareholders, as dividends. Some of the cash is used for investments. The dividend payout ratio is the fraction of the net income that a company pays to the shareholders.
Dividend payout – how you can use it
There are two important ways to use your dividend payout. The shareholder is free to use the cash as he or she pleases. Once a company closes the fiscal year and calculates the earnings (or net income) the shareholders will also receive all the documentation. They will found out how much cash was generated and the exact amount of money they get for their shares. The investors get the cash through checks or through electronic transfer, directly into their bank account. However, there is another course of action for your dividend payout. You have the possibility to leave the money into an account and to use them to buy more shares, increasing your participation to that company (this is call a DRIP). A good example of constant dividend payout comes from Johnson & Johnson, which in the last ten years maintain a range between 35% and 45%.
What dividend payout ratio tells you about a company
The dividend payout ratio is an important number, which tells you a lot about a company. The number is a percent and represents how much of the earnings for a determined period of time reach to the investors. For example, if you invested in a company and the company announces, for that year, a dividend payout ratio of 40%, it means that you will get 40% of the earnings generated by the shares you own. The rest of the earnings, in this case 60%, will remain in the company and will be use for investments. Generally, big, well-established companies tend to return a bigger part of the earnings to the shareholders. Low payout ratio can also lead to future dividend raise. New, emergent companies have very low dividend payout ratio or even zero. However, that is not necessarily a bad thing; it just means that the money is reinvested in the company, generating capital growth. You can read more info on dividend payout ratios and how to calculate it in this article: What is a Dividend Payout Ratio.
How to pick the right investments for your needs
If you are looking for places to invest your money, the dividend payout ratio provides you a lot of information. A high dividend pay ratio tells you that the company returns a big part of the earnings to the investors. This type of companies is suitable for you, if you are looking for high current income. If you are aiming for capital growth and you want to pay lower taxes, then you should invest your money on emergent companies, with low dividend payout ratio. They will bring you nice returns on the long term, and, in the mean while, you pay lower taxes for capital gains.
You can buy dividend-paying stocks from the stock market
For a profitable investment portfolio, a good strategy is to include some dividend paying stocks to it. This type of stock comes with a lot of advantages. You get cash returns quarterly, whether the stocks of the company go up or down. This way, you are protected against the periodic, inherent turmoil of the stock market. Investing your money in solid, dividend-paying companies is the right strategy for long-term investments. The dividends are not guaranteed, but statistics show that most companies raise their dividend payout ratio over time or at least maintain it. Purchasing dividend paying stocks protect your from most of the stock market investing risks.
Dividend payers are solid, well established companies and, on the long term, most of the returns come from dividends. Any investments strategy should focus on those companies.
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