I suppose there are many ways to get into the stock market, but today I want to talk about investing for dividends.
When a company has been in business for a long time and the market the company is in has matured to the point that it no longer makes sense for the company to try and grow its market share it often leads the company to offer a dividend to its shareholders. A dividend is paid out to shareholders as a way of rewarding them for owning a part of the company and as a way of attracting new investors.
When people or institutions purchase shares in a publicly held company, they become part-owners of that company. As owners, they are entitled to a share of the profits. So a company determines its profits and divides that by the number of outstanding shares that are held in order to determine how much to pay each shareholder. That is a simplistic view of what takes place, but you get the picture.
Dividends are paid out monthly or, in most cases, on a quarterly basis.
New companies just starting out will usually not pay a dividend (or at least not much of one) because they tend to reinvest all their profits back into growing the business. If they offer a successful business model (or are thought to by investors) they may do an initial public offering (IPO) and begin selling shares to the public. This is usually done on one of the well-known stock exchanges such as Nasdaq or the New York Stock Exchange. With an IPO, investors are usually looking for their share prices to increase rather than hoping for a dividend to be paid.
But there are older blue-chip companies that have been around for a long time that have an established history of paying a dividend. Many investors have come to rely on these dividends for a steady income. This is especially true for retirees and institutions that invest for retirement plans.
Income from dividends is called "passive income" because your money is making money without you having to do anything. Passive income is sort of like you being the bank and making an interest rate off of the loan you made to the company when you bought shares of the company's stock. It isn't really an interest rate but a share of the profits.
So, the question arises: what does a company do when profits go down? Does it continue to pay a dividend? This is an important question because a person who invests in dividend-paying stocks is planning for a certain income and, if the company stops paying the dividend, it can make for a bumpy financial ride. So, what to do?
Well, the bad news is there are companies that either must reduce their dividends or stop paying them altogether, which usually results in some very disappointed shareholders.
On the other hand, there are companies that have been paying a steady dividend for 40 or 50 years, some even longer. Better yet, there are companies that have been increasing their dividends for more than 50 years. So, not only have they paid a steady dividend, they have increased their dividend every year. These companies are known as the Dividend Kings and for 2021 there are currently 31 of these listed.
On the list you will find such well-known companies as Coca-Cola, Johnson & Johnson, Lowe's, 3M, Proctor and Gamble, Hormel Foods, Stanley Black and Decker, Tootsie Roll and Emerson Electric. All of the companies on the list have been increasing the amount of their dividends for over 50 years. The list can be found online ... just Google "dividend kings."
For most, if not all, of these companies, making sure their shareholders receive their dividends is paramount. They will bend over backward to pay their shareholders and for most of them, it isn't all that difficult since they carry little to no debt and tend to be quite profitable.
For the investor looking to supplement Social Security income or looking for a relatively safe place to park some money long-term, investing in one or several of the dividend kings might be a good option. Plus, reinvesting the dividends is a great way to grow a nest egg.
TD Ameritrade is an established company that can be used to buy and sell individual stocks as well as mutual funds and other investment vehicles. M1 Finance has a pretty good app and so do a number of other brokerage firms. It really pays to do your research before plunging in. Just bear in mind that investing in stocks carries a certain amount of risk and your investment is not protected by the government like a savings account would be. But then, putting money in a savings account is not really investing since it probably won't keep up with inflation.
Sam Byrnes is a Gentry-area resident and contributor to the Eagle Observer. He may be contacted by email at [email protected]. Opinions expressed are those of the author.