Dividends and dividend yield can ensure a steady income for life

Posted by alisonreid29 on March 5th, 2015

Investing in company stocks is a great way to ensure that you earn a particular share of the profit in dividends whenever the company decides to distribute its profits. If you want to calculate your return on investment on the stock, without any capital gains, then you would need to find out what your dividend yield will be. It is a ratio that shows the payout amount of a company in relation to its share price. There are many important considerations to be taken into account before investing in a particular equity position. For instance, the financial performance of the company for the last ten years or more, the profit standing and dividend yields.

The point to remember here is that the company that can pay dividends is in a stable financial condition and that will help the investor decide whether or not to invest in the company’s equity. The stability will in turn result in a steady increase in the prices of the company’s stock and the shareholders can enjoy regular payments without any fear of a cut in dividend per year. It is also important to keep an eye on the national and global economic condition and the stock market responses to the same.

As an example, let us take up a stock market situation. If the energy sector isn’t doing well due to the falling prices of crude which is resulting in decreasing investments in the sector, then you should concentrate in industries which is not as volatile as this and can give you a regular dividend yield. According to experts, composites and titanium are the safest bets considering that the market demand for these two hardly ever diminishes.

For the year ahead, if you want a steady income from dividends then the sectors that should be high on your priority list of investments are defense, automobile manufacturing, aerospace and high technology. The raw material providers to these segments are in the best position to give the investors a good dividend yield. 

Before investing into the equity of a company you must definitely carry out an in-depth analysis of its financial position. If there is any cut in dividend payments in the past then the company may have a chance of running into a cash crunch again. But if a company shows a steady payout of dividends and profitability in its annual balance sheets for at least a decade or more, in that case it is considered to be a safe bet. Investing in stocks is considered as a good long-term income mode for young people and those looking at retirement. Now, another point to remember is that dividend yield being the ratio between the dividend per share and the price per share, the yields will definitely increase once the share prices falls. So, as an investor, you should also observe the prices of a company’s share.

Finally, it is also recommended that if an investor is looking at earning a good amount from dividends then they should look at reinvesting their dividends and trust their money in the power of compounding. This implies that with time money can grow if you have the required patience and trust on the stock to reinvest. The dividend reinvestment plan or DRIP can give you better dividend yields and it is a plan in which a company purchases additional shares instead of giving you the check for your dividend earned.

Gain knowledge about dividends and dividend yield to ensure a steady growth of your stock investment.