Dividend Investing Guide: A Guaranteed Passive Income for Your Future!
Dividends are the mandatory distribution of a portion of a company's profits to its shareholders. It's important to note, though, that not all companies are required to distribute dividends, as it depends on the country's legislation.
What Is a Dividend?
Assuming you've purchased shares in any dividend-paying company, you become a shareholder in that company and gain the right to a portion of its profits.
To make it easier to understand, imagine that any company listed on the stock exchange is like a pizza, and each slice represents the number of shares each person holds. Here, you'll need to picture thousands of slices, some large, others very small, all on the same pizza. Depending on the size of your slice, that is, your participation as a shareholder, you will receive a percentage of the profit that the company decides to distribute in proportion to your shares, in other words, proportional to the size of your slice.
If the company decides to divide the entire pizza, in other words, distribute all of its net profit, then it's said that the company pays 100% of the dividends. This is not common, and most companies choose to distribute only a small percentage of their profits, such as a quarter of the pizza, 25%, for example.
You might be wondering why the company doesn't distribute all of its profit. That's because, despite being one of the main reasons investors are interested, every company needs profit to reinvest in itself and grow, turning today's profit into more profit tomorrow.
Which companies pay good dividends?
How can we identify companies that will pay good dividends? To do that, you'll need to use some important indicators.
This is perhaps the most important of the indicators for those concerned with dividends. However, it is not the only one and should not be the only indicator considered when buying stocks with dividends in mind, which is a mistake that many beginning investors make.
The dividend yield indicates the dividends paid per share divided by the share price. This results in a percentage that represents the yield generated for the shareholder through dividend payments. For example, if a company is trading at $10 per share and that same company distributed $1 per share in dividends over the last year, the dividend yield for that company is 10%, which is one divided by ten.
A high dividend yield does not necessarily mean a good sign, as you need to evaluate other indicators together with this and understand what classifies a company as a good dividend payer.
However, there are still other fundamental indicators that are quite important to take into consideration, but these two are the most important.
Is it possible to live off dividends or not?
Yes, it is possible. In fact, there is a portion of investors who live this way, relying solely on dividends as their primary source of income. However, these individuals will need to follow certain steps to achieve this, and if you want to one day live off dividends, you should also follow these same steps.
1º Step to living off dividends
Open an account with a brokerage? It might seem quite obvious, but only this way will you be able to start investing in stocks, as, first and foremost, to receive dividends, you need to invest in stocks or etf.
2º Step to living off dividends
Learning to operate in the stock market. With your account opened, it will be time to learn how to buy and sell stocks. And I'm not talking about the application of strategies and techniques to select good stocks, but rather the operational aspect of handling a home broker and learning how to place buy and sell orders for stocks. Once you've mastered this operational part, you can move on to the third step.
3º Step to living off dividends
Choosing good stocks. To do that, you will need to analyze some of the indicators I mentioned in conjunction, and you can access these indicators to begin your analyses.
4º Step to living off dividends
Reinvest your dividends or at least a significant portion of them to take advantage of the power of compound interest and accelerate the growth of your wealth. This is because to live off dividends, you need to have accumulated a substantial amount of assets invested in stocks.
So, did you like what dividends can offer you?