Thursday, June 17, 2010

What is Dividend Investing?

For my first post I want to simply introduce the realm of dividend investing.  What is a dividend?  A dividend is simply a portion of the earnings a company pays to its shareholders, either monthly, quarterly, semi-annually or annually.  My main focus will be on common shareholders ( I won't get into preferred shareholders etc.).

There are three dates that every investor needs to know:
"Declaration date: The declaration date is the day the Board of Director’s announces their intention to pay a dividend. On this day, the company creates a liability on its books; it now owes the money to the stockholders. On the declaration date, the Board will also announce a date of record and a payment date.
Date of record: This date is also known as “ex-dividend” date. It is the day upon which the stockholders of record are entitled to the upcoming dividend payment. According to Barron’s, a stock will usually begin trading ex-dividend or ex-rights the fourth business day before the payment date. In other words, only the owners of the shares on or before that date will receive the dividend. If you purchased shares of Coca-Cola after the ex-dividend date, you would not receive its upcoming dividend payment; the investor from whom you purchased your shares would.
Payment date: This is the date the dividend will actually be given to the shareholders of company."
(Compliments to Dividend 101)

Just to get that out of the way.  Why would you want dividends?  No brainer - they provide you with a Cash Flow.  Cash flow is key.  Appreciation = bonus in the end.  I only invest for cash flow or potential future cash flow.  Example, Say you are investing for the "Long Term" why they hell (pardon my language) would it matter if your stock/mutual/reit etc price rose today or dropped today?  If you are a 22 year old man, why the hell would it matter if your share price of Coca Cola dropped $20 today alone?  Answer: It wouldn't matter especially if it was due to irrational behavior or difficult economic times, such as what we have experienced lately. In fact, if it's a stable company and nothing is truly wrong, you'd want it to decline in price, so you can buy more shares while it is "discounted".  It is a huge bonus if they pay a consistent dividend, and even that much better if they always increase in good and bad times.  

Bottom line: Dividend Investing is investing into companies, funds, etfs, reits that provide a consistent yield during the year that can provide you a source of cash flow.  What you do with that cash flow is up to you.  It merely breaks down into 3 options: Keeping the cash for yourself to spend (One).  Reinvesting the dividends back into more shares from that company (Two).  Using the dividend to purchase shares of ANOTHER company (Three).  I will explain in later posts on these 3 options.

Welcome to the world of Dividend Investing.  I will hopefully be able to show you the amazing upside that investing in this manner has and the wonders it may bring.  

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