Good Morning Green Panda Friends. I hope that you are all having a great 2012 so far, even though we are only a few days into the New Year. Today is the next post in our “Investing: The Ins and Outs of Dividends” series. Yesterday we discussed some basic investment options as well as the types of accounts that are available for new (and experienced) investors. Today we are going to discuss investing in Dividends and why Dividend Investing can be beneficial to you.
There are many different investment options available on the market from low risk investments such as Money Market Instruments which invest in short term investment instruments, to higher risk investments such as Sector Mutual Funds which invest in only one particular sector of the economy like Climate Change, Health Care, or Technology.
Dividend investing is a great investment strategy for new investors as well as for experienced investors. Dividends are a quarterly or annual payout of a company’s profits to their investors. Companies who pay out dividends to their investors on a quarterly basis choose to do so instead of retaining that money in the company profits.
When companies pay out their profits in the form of dividends to their shareholders it is an incentive for new investors to purchase more stock units of their company. Company dividends are usually paid out on a quarterly basis. They can be mailed to investors in the form of a check or they can be used to purchase more units of the same company stock.
It is most beneficial for investors to have dividends reinvested in order to purchase more units of that company’s stock each quarter. Reinvesting dividend payouts has the same effect as compounded interest on a Term Deposit.
As an example, let’s say that we start investing with 100 stock units and we chose to reinvest our dividends in the first quarter to purchase more units of that company’s stock. This means that the next quarter we will have more units; therefore our next dividend payout will be based on our original 100 units plus the new units that were purchased with our first quarter dividend reinvestment.
The Benefits of Dividends
There are several benefits of dividend investing such as access to investing in Equity Investments with medium risk. We say that Dividend Investing is medium risk because yes Dividends do require investing in Equity Mutual Funds and Stocks which are considered to be higher risk investments. However Dividends are paid from large companies who have a proven history of growth in the past, and there is lower risk involved when investing in large companies. Some Investors consider dividend stock investing to be a low risk fixed income investment because of the regular stream of income of the dividend payout. Some other Investors consider dividend investing to be a higher risk Equity investment because technically we are investing in stocks of a company. This is why I consider dividend investing to be a medium risk investment.
The main benefit of dividend investing is the stability of income. When we invest in Dividend Stocks or Dividend Mutual Funds we are certain that we will be paid out a dividend every quarter. Dividends are paid out per each stock unit. This means that if a company pays out $0.52 per stock unit and we own 100 units we will have a total quarterly dividend payout of $52.00.
Please check out the previous post in our “Investing: The Ins and Outs of Dividends” series:
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