PART 2: THE INVESTOR'S GUIDE TO DIVIDENDS
Hi Everyone❤️. Welcome back! Last week, we looked at the basics of dividends—what they are, how they work, and why companies pay them. Today, we are diving deeper into the world of dividends from an investor’s perspective. We will uncover why some companies opt not to pay dividends, how dividends affect stock prices, and how you can calculate the dividend yield to make more informed decisions. Plus, we will look at the potential risks and rewards of investing in dividend-paying stocks. Let’s continue this journey of understanding dividends and how they fit into your investment strategy!
1. WHY DO SOME COMPANIES NOT PAY DIVIDENDS?
- Reinvestment: Fast-growing companies often choose to reinvest profits into the business to fuel further growth, rather than paying out dividends.
- Debt Management: Companies that have high levels of debt may prioritize paying down debt or investing in the business rather than paying dividends.
- Expansion Plans: Companies with large capital expenditure plans may retain earnings to fund expansion projects.
- Cyclical Nature: Companies in cyclical industries may withhold dividends during downturns to conserve cash for difficult times.
2. HOW DIVIDENDS IMPACT STOCK PRICE:
When a dividend is declared, the stock price may initially rise as investors buy the stock to qualify for the dividend. However, on the ex-dividend date, the stock price usually drops by the amount of the dividend, as new buyers are no longer entitled to receive the dividend.
For example, if a company declares a dividend of NGN 2.00 per share and the stock is trading at NGN 100.00, on the ex-dividend date, the stock may trade at NGN 98.00.
3. DIVIDEND YIELD AND HOW TO CALCULATE IT:
Dividend yield is a financial ratio that shows how much a company pays out in dividends relative to its stock price. It’s a critical measure for income-focused investors, as it indicates the return on investment from dividends alone.
Formula: Dividend Yield = (Annual Dividends per Share ÷ Price per Share) x 100
For example, if a company pays an annual dividend of NGN 5 and its stock is trading at NGN 100, the dividend yield would be 5%.
4. BENEFITS OF DIVIDENDS TO INVESTORS:
- Regular Income: Dividends provide a steady income stream, which can be especially important for retirees or those seeking passive income.
- Compounding Returns: Reinvesting dividends back into the stock can help compound an investor’s returns over time.
- Stability: Dividend-paying stocks tend to be less volatile compared to non-dividend-paying stocks. Investors perceive companies that consistently pay dividends as stable and reliable.
- Inflation Hedge: Dividend growth can act as a hedge against inflation, particularly when companies increase dividends in line with earnings growth.
5. RISKS ASSOCIATED WITH DIVIDENDS:
- Dividend Cuts: If a company faces financial difficulties, it may cut or suspend its dividend payments. This can negatively impact the stock price and investor sentiment.
- Tax Implications: Dividends may be subject to tax, depending on the investor's tax jurisdiction, reducing the net benefit of the dividend.
- Over-reliance: Investors who rely solely on dividends may miss out on growth opportunities from stocks that reinvest profits for expansion rather than paying them out.
CONCLUSION:
Dividends are an excellent way for investors to generate income while holding shares of a company. While not every company pays dividends, those that do offer investors a direct link to the company’s profitability. Understanding how dividends work and incorporating them into your investment strategy can significantly improve your portfolio’s long-term performance.
We have come to the end of our teaching on dividends. Thank you for staying tuned❤️❤️
Hi Everyone❤️. Welcome back! Last week, we looked at the basics of dividends—what they are, how they work, and why companies pay them. Today, we are diving deeper into the world of dividends from an investor’s perspective. We will uncover why some companies opt not to pay dividends, how dividends affect stock prices, and how you can calculate the dividend yield to make more informed decisions. Plus, we will look at the potential risks and rewards of investing in dividend-paying stocks. Let’s continue this journey of understanding dividends and how they fit into your investment strategy!
1. WHY DO SOME COMPANIES NOT PAY DIVIDENDS?
- Reinvestment: Fast-growing companies often choose to reinvest profits into the business to fuel further growth, rather than paying out dividends.
- Debt Management: Companies that have high levels of debt may prioritize paying down debt or investing in the business rather than paying dividends.
- Expansion Plans: Companies with large capital expenditure plans may retain earnings to fund expansion projects.
- Cyclical Nature: Companies in cyclical industries may withhold dividends during downturns to conserve cash for difficult times.
2. HOW DIVIDENDS IMPACT STOCK PRICE:
When a dividend is declared, the stock price may initially rise as investors buy the stock to qualify for the dividend. However, on the ex-dividend date, the stock price usually drops by the amount of the dividend, as new buyers are no longer entitled to receive the dividend.
For example, if a company declares a dividend of NGN 2.00 per share and the stock is trading at NGN 100.00, on the ex-dividend date, the stock may trade at NGN 98.00.
3. DIVIDEND YIELD AND HOW TO CALCULATE IT:
Dividend yield is a financial ratio that shows how much a company pays out in dividends relative to its stock price. It’s a critical measure for income-focused investors, as it indicates the return on investment from dividends alone.
Formula: Dividend Yield = (Annual Dividends per Share ÷ Price per Share) x 100
For example, if a company pays an annual dividend of NGN 5 and its stock is trading at NGN 100, the dividend yield would be 5%.
4. BENEFITS OF DIVIDENDS TO INVESTORS:
- Regular Income: Dividends provide a steady income stream, which can be especially important for retirees or those seeking passive income.
- Compounding Returns: Reinvesting dividends back into the stock can help compound an investor’s returns over time.
- Stability: Dividend-paying stocks tend to be less volatile compared to non-dividend-paying stocks. Investors perceive companies that consistently pay dividends as stable and reliable.
- Inflation Hedge: Dividend growth can act as a hedge against inflation, particularly when companies increase dividends in line with earnings growth.
5. RISKS ASSOCIATED WITH DIVIDENDS:
- Dividend Cuts: If a company faces financial difficulties, it may cut or suspend its dividend payments. This can negatively impact the stock price and investor sentiment.
- Tax Implications: Dividends may be subject to tax, depending on the investor's tax jurisdiction, reducing the net benefit of the dividend.
- Over-reliance: Investors who rely solely on dividends may miss out on growth opportunities from stocks that reinvest profits for expansion rather than paying them out.
CONCLUSION:
Dividends are an excellent way for investors to generate income while holding shares of a company. While not every company pays dividends, those that do offer investors a direct link to the company’s profitability. Understanding how dividends work and incorporating them into your investment strategy can significantly improve your portfolio’s long-term performance.
We have come to the end of our teaching on dividends. Thank you for staying tuned❤️❤️
