Dividends are an essential concept of finance and can make the difference between a good investment and a bad one.
What is a Dividend?
A dividend is a payment that a public company makes to its shareholders. Assuming the company is financially healthy, this payment will come from profits that the company does not need to re-invest back into the business.
How much does the stockholder get paid?
A dividend payment is measured as a percentage of the capital that a shareholder has invested in the business. For example, if a stockholder has $100 dollars of stock, and the dividend rate of a company is 1%, that stockholder will receive a $1 dividend payment.
In other words, a dividend payment is proportional to how much an investor has invested in the business.
What is a good dividend and how does it factor into my portfolio?
Companies that provide over a 3% dividend yield are considered to have ‘high’ dividends. These companies are sometimes called ‘dividend stocks’ and it is common to own these companies, regardless of their growth potential, to benefit from the fixed income that dividends provide
A 2% dividend is still good if an investor believes that the stock has some potential to increase in valuation, but this would not be considered a ‘dividend stock.’
Any dividend of 1% or lower should be considered as a bonus for a stock that an investor believes can grow, but is not a major factor in an investment decision. In other words, all else being equal, buy a stock with a small dividend over a stock with no dividend. However, if one stock with no dividend has a significantly higher growth potential than a stock with a small dividend, buy the stock with more growth potential.
What are some good companies to look at with high dividends?
Atlantica Yield (NASDAQ: AY) - green energy company with a 4.8% dividend
City Group (NYSE: C) → bank with a 2.8% dividend
Brookfield Renewable Partners (NYSE: BEP) → green energy company with a 3.1% dividend.