For some investors, a little extra money may sound like a good idea. But if you really want to take advantage of time in the stock market, reinvesting those dividends can pay off ten-fold.
If you’re searching for new stocks to invest in, adding a dividend criteria to your list might boost your income. Here’s how you can choose the right dividend stocks for you.
What Are Dividends?
Dividends are payments to investors that are paid out either monthly, quarterly, or sometimes annually. Usually, dividends are paid out in cash.
“Dividends are direct payments that an investor receives from the company’s earnings,” says Kevin L. Matthews II, founder of BuildingBread, an investing education company. “I like to think of dividends as a ‘thank you’ or ‘tip’ for investors.”
Owning shares of a stock or fund that pays out dividends gives you an extra cash bonus. You can use those dividends to reinvest in the stock, which experts say is probably the best move, or transfer it to another investment you’re interested in.
Having a little extra cash in your pocket every quarter may work for some investors, but experts agree that reinvesting your dividends back into the stock market will pay off in the long run.
Not all stocks and funds offer dividend payouts, and there’s a lot of variety among the ones that do. For instance, you could get a payout that’s a few cents per share or a few dollars per share. It’s up to each individual company how they want to manage these options for investors.
Quarterly vs Monthly: What’s the Difference?
Dividends usually pay out every quarter, although that timetable isn’t required for every dividend-paying company. Some opt to pay their investors every month while others pay semi-annually or annually. The difference doesn’t come down to how much you earn, but rather, the frequency in which a company wants to pay investors.
“When dividends are paid out and how much is being paid is determined by how well the company performed during that time and the company’s leadership,” Matthews says. “The returns between the two are usually marginal because a $3 monthly dividend is the same as a $9 quarterly dividend. It is really going to come down to the company’s financial position.”
Which Earns Higher Returns: Quarterly or Monthly?
It doesn’t matter how often an investor gets paid because it doesn’t change the amount of the payout, says Riley Adams, CPA and Editor-in-Chief at CompareForexBrokers.com. It comes down to what you do with that payout.
“If a company offers a 5% annual dividend, you would theoretically receive the same net cash payout by year’s end: 5% divided by 12 or 5% divided by 4,” Adams says.
How to Tell When Dividends Are Paid on a Stock or Fund
Since not all investments pay dividends, you’ll have to do some homework to find the ones that do.
“The most direct [place] is the company’s website itself,” says Matthews. “But some of the major brokerages and apps provide a dividend calendar which tells you which companies are paying dividends, how much a company will pay, and when those payments will be issued.”
When looking up dividend-paying stocks and funds, you’ll want to pay attention to a few things, like the ex-dividend date.
“This is the date that the stock will trade without its dividend rights,” Matthews says. “If you happen to buy the stock on that day, then you will not receive that first dividend and will have to wait for the next payment.”
Adams also suggests looking at the record date and payment date.
“The ex-dividend date is the last date for which an investor can purchase stock in the dividend-paying company and expect to receive a dividend,” Adams says. “This commonly occurs before the record date, which establishes which shareholders will receive dividends. The payment date occurs after this and is when investors receive the actual dividend payments.”
How to Find and Invest in Dividend-Paying Stocks
Using a stock screener is a great way to find stocks that pay dividends.
“If you want to know if a specific company pays a dividend you can look at the ‘Dividend Yield’ section on any financial summary screen,” Matthews says. “If the section is zero or blank then it does not pay a dividend.”
He suggests looking at how a company performs holistically alongside its dividend payout.
“Dividends are dependent on the company’s performance and can be suspended or reduced if the company isn’t doing well,” Matthews says. “This happened with Ford in 2006 and again in March of 2020 until it announced again that they would be resuming payments.”
Many mutual funds and ETFs pay dividends as well. They pass on dividends from the individual companies included in the fund.
Adams says attention to detail is a must when screening dividend-paying stocks. Look at the dividend payout ratio.
“Should [the dividend payout ratio] get too high — generally above 50% — it means a significant amount of the company’s earnings go toward funding the dividend and not reinvesting back into the business. High payout ratios can hinder a business’ long-term prospects, potentially eroding its value as a quality dividend-paying stock in your portfolio.”
Adams also suggests looking at the debt-to-equity ratio.
“You want to make sure this company is capitalized prudently, meaning they haven’t taken on too much debt to fund their operations,” he says. “An overreliance on debt can put the company in financial exigency should something not develop as executives forecasted.”