Potential returns are the first thing investors look for before investing their money in an asset. Several investments grow in value, but dividend stocks regularly produce a predictable return. Many people turn to dividend-based investment as it is considered a profitable and safe asset. But before jumping on the bandwagon, have you considered all the risks of dividend stocks? Let’s uncover some essential facts about dividends!
Note the key dates related to dividends
When it comes to dividends, companies have different ways of working. If you have multiple dividends, it may be hard to track every single one without having a planner. Dividend investment is easy, but it still requires attention and management. To oversee your investment, make sure to understand the policy and take notes of several key dates:
- The announcement date—also known as the declaration date—is when the board of directors gives public notice of its dividend plan. Stock owners usually receive notifications via email when the company declares dividend payments.
- The ex-dividend date is when the stock owners are no longer owed a dividend payment. If there is an investor who purchases a stock on or after the ex-dividend date, they will not receive any declared dividend. Ex-dividend is usually a day before the record date.
- The record date is the day when the board of directors records a list of stock owners who will receive a dividend payment.
- The payment date is the day when stock owners will receive a dividend payment.
A company’s industry may impact how much dividend it pays out
Some companies have a higher income than others, but it’s not always the case. Instead, look at the industry. Fundamentally, companies in a high-earning sector are more likely to provide more significant dividend payouts. Although you’re still advised to diversify your portfolio, focusing on these industries can be worthwhile. Look for companies with many retained customers, such as telecommunication giants, utility companies, and banks.
Dividend stocks are not without risks
Newbie investors always get recommendations to start with dividend stock as it’s more reliable and safe. People look up to the dividend aristocrats, companies that have consistently given out dividend payouts for the last 25 years. However, investing in only dividend stocks is not the safest route. It can slow down your growth.
Dividend investment still possesses some risks, although they’re arguably lower than forex or crypto assets. Stock owners may think a company is doing well because it keeps giving dividends. However, there are cases when companies distribute dividends as a “consolation prize” to distract stock owners from the lack of growth within the company. This situation is known as a dividend trap, so beware of it.
Dividends are not guaranteed
Here’s an important reminder that most beginner investors forget or don’t know: dividend payouts depend on the company’s earnings. Even if a company has been paying stock owners dividends for years, it can and will stop giving dividends when its income suffers a decline.
Companies with strong business models and balance sheets can bounce back and continue giving dividends as soon as the grass gets greener. But as investors, you should study the company’s profitability and the current economic situation carefully. You are investing in the future, so think of the present as a premonition. If you notice any red flags and act quickly, you may be able to prevent a terrible loss.
Be cautious of high payouts
Often, companies hand out dividends, not as an act of kindness. The board of directors decided they would not reinvest this money to grow the business. Financial advisors and analysts agree that a company with healthy finances should avoid giving out >50% of the dividend rate. That way, the company can appease the stock owners and have enough budget to expand.
Dividends are taxed in a unique way
Filing taxes is a duty of all citizens, but it creates more questions than answers. Many aspects and clauses must be understood regarding investment and its tax. Your profession and annual income affect how your dividend stock will be taxed. In Malaysia, however, stock owners are not required to pay taxes from dividend payouts. It’s because Malaysia has a single-tier tax system in which the companies have already paid the taxes before distributing the dividends.
Dividends are paid on a variety of schedules
The common practice is granting dividend payouts quarterly or every three months. Although most companies comply with this unspoken “rule,” the schedule is entirely up to them. Big companies like Disney, for example, only give out dividends twice a year. Meanwhile, some companies distribute monthly dividends.
Dividend investment is an attractive option if you’re looking to diversify your portfolio. However, it is not the only asset you can invest in, nor is it recession-proof. Understanding the risks of dividend stocks will help you make a sound decision without rose-coloured glasses.