Today let’s talk about what dividends are and why we like them so much.
Dividends are funds, money, that companies give to those who own their shares. Generally speaking, we do not talk about very large figures per share, but having so many shares the figure begins to be interesting.
In fact, owning this kind of shares leads to having extra cash flow in our account. A gain is not only made by buying and selling the shares but also by owning these dividend-paying shares.
Now, the first thought that comes to mind is that a stock portfolio can only be made up of dividend-paying stocks, but you have to be very careful. In fact, it is a good strategy but it has inherent problems.
Theoretically, companies pay dividends when they think they cannot increase their earnings by reinvesting in the company. Very often dividends are used as a tool in the hands of companies to remunerate part of the management and part of the corporate stakeholders.
This is why dividends are paid more easily by companies that have been on the market for some time and not by new companies that need to reinvest in themselves or that do not even have this liquidity.
The corporate sector also plays a role in paying dividends. some sectors are more inclined like the energy and oil sector, where only it is easier to create long-term contracts with sovereign states, with large and certain cash flows. These are stable operations in a “slow” market.
The companies of the new economy instead work in a very fast market, much more fluid and with big technological changes that does not lend itself.
Dividends can be a great solution for income investors, like those who invest to get money into their portfolio.
The risk management of dividend stocks is slightly different from others. In fact, one is led to think that companies that give dividends are more disciplined, giving a sense of security to the investor. In this way, the investor himself has a management that can be simplified having a certain annual return.
One of the possible strategies with dividends is to reinvest buying other stocks that will pay more dividends and so on for years to come.
It must be said that having a dividend-only portfolio is an interesting idea, but we must also understand that to have interesting figures we will have to immobilize an important figure on the stock market, which is notoriously risky and volatile. Stocks can crash and companies can make mistakes that can lead them to eliminate dividends. Unfortunately, the market does not appreciate this move and that company’s stock could suffer a further collapse.
Dividend stocks are attractive but should not be abused.