What Exactly is Dividend Investing?
Updated: Jul 25
When you own a company stock that pays you a dividend, you are getting a share of that company’s profits. This means that you can earn an additional income on top of any potential growth in your investment.
According to Joshua Kennon, co-founder of Kennon-Green & Co., an asset manager for high-net-worth individuals, buying stocks that pay dividends can reward you over time, if you make smart buying choices. He also suggests that when you are investing, look for dividend safety. This means, you should first determine how likely it is that a company will keep paying dividends at the same rate or higher.
In uncertain markets, investors may look to dividends to maintain a more stable source of income to their portfolio, explains Tracey Lundell, Senior Investment Advisor at Sea Glass Wealth Advisory Group. While most investors have heard of dividends, some may not fully understand what they are and how they form an important component to most financial plans.
Fidelity International has released a great article that explains dividends in an easy to digest snapshot. However, not all stocks pay dividends — if you are interested in investing for dividends, you will want to specifically choose dividend stocks, such as RE Royalties.
What is a dividend?
When companies make a profit, they can do several things with it.
They can reinvest the profit back into the business to help it grow;
They can use it to pay down debt;
They can decide to pay dividends.
A dividend is simply a distribution of a company's profits to its shareholders.
When you own shares of a company that pays dividends, you may receive those payments.
Investing in publicly listed companies (that don't pay a dividend) doesn't give you immediate access to cash in hand, as you're just profiting from a possible increase in the value of your assets. Whereas, dividend payments provide a way to receive regular cash income from your portfolio.
Some investors prefer dividend stocks as a source of regular income, such as retirees looking to supplement their pension.
That's why dividend investing can be such a powerful tool, especially for those looking to build long-term wealth. Not only do you get to participate in a company's growth, but you also get paid along the way.
Arielle O'Shea and Tiffany Lam-Balfour explain that there are several types of dividends a company can choose to pay out to its shareholders. They also share how an investor can use different methods to learn more about a company's dividend and compare it to similar companies.
However, in this article, we are focusing on two types of dividends:
1. Cash dividends. A company will declare a cash dividend and then pay it out to shareholders, usually every quarter.
2. Stock dividends. A company can also choose to pay shareholders in additional shares of stock rather than cash. This is known as a stock dividend or a scrip dividend.
That's because dividend stocks provide two sources of return: regular income from dividend payments and capital appreciation of the stock price. This total return can add up over time.
Dividend investing is a strategy where you seek out stocks that pay regular dividends and then hold on to them for the long term.
The intent is to build a portfolio of dividend stocks that will provide you with a regular income, regardless of what the stock market is doing.
Of course, not all companies will pay dividends consistently, and the amount they pay can also fluctuate. However, some publicly traded companies like RE Royalties are known to have paid dividends from the very beginning.
Dividend investing is a method of buying stocks that pay dividends, to receive a regular income stream from your investments. This income is in addition to any growth in your portfolio as its stocks or other holdings gain value.
There are two key things to look for when investing in dividend stocks:
Companies that have a history of paying dividends consistently.
Companies with a solid financial position, which makes it less likely that they will cut their dividends.
If you pick the right companies, dividend investing can be a great way to build long-term wealth.
Related: Dividend Investing: Canada’s Complete Guide to Dividend Stocks
Over time, companies that have been consistent dividend payers have tended to outperform the market. By incorporating some traditional dividend-paying stocks into your portfolio, you can help to smooth out the ups and downs of the market and continue to make money.
Investing in dividend stocks may be considered as part of the goal to building long-term wealth. If you are interested in learning more about dividend stocks, this article by TD Bank may be helpful.
At RE Royalties, we strive to provide our shareholders with strong capital returns, growth and a stable distribution, all while helping reduce global greenhouse gas emissions.
You can find us on the TSX Venture Exchange under the symbol "RE" and on the OTCQX Best Market under the symbol "RROYF."