Why you can’t ignore dividends when you invest

Julie Brownlee, Fsp Invest, 28 Mar. 2014

Tags: dividends, invest, investing, income paying shares, why companies pay dividends, dividend yield, dividend paying share, how to calculate dividend yield

Investing in shares isn’t just about hoping the share price will rise to make you money. You can generate an income from any dividends a company may pay out. Read on to uncover one way you can spot a decent dividend paying share…

Why do companies pay dividends?

Paying dividends is a company’s way of returning some of its profits to shareholders, Phil Oakley in Money Week explains.

A company that grows its dividends will be growing its earnings too. And earnings that rise over the long term should result in a rising share price.

Holding shares that pay dividends should make up a part of your portfolio. This means your portfolio will pay you an income.

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How to spot a good dividend paying share

One thing you need to check is if the company is paying a decent dividend yield.

It’s easy to calculate the dividend yield of a share. It’s the annual dividend payment divided by the share’s current price.

For example, if a share pays 5c in dividends over the year and the current share price is R1, the dividend yield is 5%.

You want to look for a dividend yield that’s higher than the market average. So if the JSE’s top 40 is sitting on a dividend yield of 3%, then you should be looking for companies that pay out yields higher than that.

If you want to generate income from buying dividend paying shares, there’s no point buying shares that have a low dividend yield.

But, be wary of companies with very high yields. It’s unlikely a company can maintain this level. And companies are under no obligation to keep paying out dividends to its shareholders.

And if a company cuts its dividend, investor usually view this as a bad sign and it has a negative effect on the share price.

So there you have it, why you can’t ignore dividends when you invest.

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