Even if you’ve received a dividend - Ka-ching! - you may not fully understand what it is and why you received it. By learning what dividends are, you’ll be able to decide whether adding dividend paying companies to your watchlist is right for you. Time to break down the basics of dividend yields, dividend payments, and those fancy dividend aristocrats - let’s dive in!
What are dividends?
Companies can decide to share their profits with shareholders, paying them in the form of dividends, which are typically cash payments. If you’re a Hatch investor and invest in a dividend paying company listed on the share markets, when you receive a dividend, it'll be paid directly into your Hatch account.
Yep, you read correctly! If you're an investor in a dividend paying company, a shareholder benefit may be receiving your share of the company’s profits as cash in your pocket, aka dividends.
Dividend payments - a reason why investors love dividend stocks
Dividend paying companies can feel like the fairy godmothers of the stock market. Typically, these are established and financially stable companies, aka blue chip companies, that choose to ‘share the wealth’ with their shareholders by divvying out the profits to everyone who invests in them.
These companies typically have a high market cap, and a proven track record of long-term growth and delivering value to shareholders. These features can make them an attractive option for investors looking to receive a regular income while they continue to invest.
Dividend paying companies can add value to investors building a diversified portfolio, especially when share markets are more turbulent than usual. While some stocks may be experiencing higher levels of volatility in the markets, dividend stocks historically have tended to be more stable, providing investors with a sense of calm.
And when you receive a dividend, you don’t have to withdraw your windfalls! Dividend payments can be reinvested and to help boost compounding growth.
How often are dividends paid?
Most companies that pay dividends to their shareholders issue them quarterly - which is every three months. There are also a small number of dividend paying companies that pay annually or fortnightly.
The decision to announce - or declare - that dividends will be issued is made by a company’s board of directors. They agree on the cash amount of the dividend and the dividend payment date, as well as how often and when dividends are to be issued and which shareholders are entitled to receive them.
Once a dividend has been declared by the board, the company then notifies the shareholders and the rest of the market. By declaring a dividend, a company is officially commiting to paying that dividend to their elected shareholders.
Different ways to get dividend payments
Money market funds
If you’re investing through Hatch, you’ll probably be familiar with the Ka-ching! emails notifying you of the dividends you’ve earned through the money market fund. This is the money showing in your Hatch account that you’ve either deposited but not yet invested, or from selling your shares and not yet withdrawn or re-invested. So yep, uninvested cash sitting in the money market fund can earn you dividends while you decide what you want to do next with your money.
High dividend yield stocks
High dividend yield stocks, often referred to as dividend aristocrats or dividend kings, are stocks from around 40+ worldwide companies that have increased the dollar value of their dividend payouts every year for the past 25 years or more. The dividend aristocrats are popular with investors who have a dividend portfolio because they’re a consistent and reliable income stream that has historically shown to increase every year. And if they don’t increase every year? They’ll be dethroned for no longer meeting the requirements of being a dividend aristocrat.
In June 2023, there were 66 stocks listed on the S&P 500 Dividend Aristocrats index, including across consumer staples, health care, and the financial and industrial sectors. The top seven by yield are:
Top 7 dividend aristocrats
Things to consider before investing in dividend-paying stocks
If you’re new to investing the options available can sometimes feel overwhelming. So it may help to remember that not every stock will work for you.
It’s OK to pause before you dive in and ask yourself whether investing in dividend paying companies aligns with your financial goals. This can mean:
- Defining your investment timeline and milestone goals along the way
- Understanding any potential tax implications for dividend paying stocks
- Being comfortable and knowing your appetite for risk
- Learning which metrics to look at when choosing a stock that pays dividends.
Investing for income vs investing for profit
Typically, investors adopting a long-term growth (LTG) strategy would not choose dividend stocks to make a large part of a diversified portfolio. They may be more likely to look for high growth stocks that focus on investing their profit back into the company to grow it, rather than the company sending profits out the door to pay investor dividends every quarter.
And by weighting your portfolio heavily towards dividend stocks, you could also end up missing out on growth stocks which may have potential to grow more over the long-term.
Dividend yield - giving way to gains
Dividend yield is an investing metric or ratio that tells you the percentage of the share prices that a company pays in dividends to shareholders annually. In other words, how much of a dividend payment you could expect relative to the stock price.
The Dividend Yield formula is:
- So if Company A’s share price is US$20 and they pay out a dividend of US$1 per share per year, their dividend yield would be 5%.
- If Company B’s share price is US$145 and they paid dividends of US$9 per share per year, that would be a dividend yield of 6.2%.
If a company's stock price dipped, and the dividend stays the same , the dividend yield goes up = yay, more dividends for you!
- So if Company A’s share price drops to US$18 and they still pay out a dividend of US$1 per share per year, their dividend yield would be 5.6%.
- If Company B’s share price is down to US$140 and they paid dividends of US$9 per share per year, that would be a dividend yield of 6.4%.
So even when stocks fall from time to time, you’ll still get the win!
Do dividends get taxed?
Dividends are taxed. Everything is taxed. The question is not ‘are they taxed?’ but ‘to what extent are they taxed?’. Thankfully Hatch has an excellent Tax Centre that you can go to when you’re sorting out your tax obligations. As a starting point, if you’ve earned less than $200 NZD total in dividends in a tax year you don’t need to worry about tax. It’s when those regal royalties known as dividends earned are over $200 NZD total in a tax year that you’ll need to file a tax return.
Dividends can feel like the gift that keeps on giving, and historically having dividend paying company stock’s in your portfolio means you can potentially earn passive income while investing. If you’re able to answer ‘what are dividends?’ and the meaning behind dividend yield, you're all set to roll… your eyes when you get your next $0.1 USD Ka-Ching email. Hey, it’s not nothing!