Dividend Investing 101: The Basics

Now that you've learned about the evils of MERs and how they eat away at your investments, this next post will cover the very basics of dividends, and how they work as an investment strategy.

A dividend is a portion of a company's earnings that is distributed to it's shareholders. It's a way of compensating you for investing in their company and gives incentive to park your money there for a period of time. If the company makes a profit each year, it's likely that they will maintain the dividend that they pay out to their shareholders. If the company has increased profits, they may increase the dividend they pay to the shareholders.

The best part of dividends is that no matter where you are, or what you're doing, your dividend will automatically be paid to you. So you can sit back, relax and have your money work for you.

 

Although many companies pay dividends, there are only a select few that increase dividends on a yearly basis. Blue chip companies are well established with stable earnings and minor liabilities who make it a priority to maintain and even increase dividends year after year. These are the types of companies that dividend investors watch and wait for a good price to buy in.

When you buy shares in a company, the return you get from your dividend investment is called the yield. It's calculated by taking the yearly dividend and dividing it by the share price you paid for your shares.

So if you were to buy shares in Bell, the current price at the time of this post is $32.68 and pays a dividend of $1.83 per year.     

1.83/32.68 = 5.6%

That's a very decent return on a dividend stock. It sure beats any interest rate the banks are paying these days. And the best part is that no matter if the stock is up or down, you are guaranteed that return unless the dividend is cut. More on that in future posts.


As I mentioned before, if a company is having a good year and profits are up, the board of directors might spread the wealth and increase the dividend paid to investors. How much they increase it depends on many things, but an increase to your initial investments return is always welcomed by a dividend investor. Bell increased their dividend a few weeks ago from $1.74 to $1.83. If we divide 1.74/32.68 we get a yield of 5.3%.  It might not seem like a huge increase, but it sure adds up over the years. That's why it's important to find good, blue chip companies to invest in to make the most of any dividend investing strategy.