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Why you should care about dividends

RagingBullRagingBull ·

Everybody loves cash, and investors and traders are no exceptions when it comes to cash payouts from stocks. Dividend stocks are popular because they generate income. Now, this is a great supplement to building up capital on top of what you would get if the stock price rises. That said, let’s explain some of the details of dividends.

Dividends explained

A cash dividend occurs when a company distributes a portion of its earnings or retained earnings to a specified class of its shareholders.The board of directors ultimately decide whether shareholders would receive a dividend or not. When a company issues a dividend, a dividend rate is given and is often quoted in terms of dollars per share. Investors generally prefer to use dividend yield to quote the dividend amount in terms of the percentage of the current market value of the stock.

Typically, blue-chip stocks and well-established companies pay dividends because their net incomes stabilized over the years. Moreover, their stock prices tend to have a lower degree of volatility. Some well-known dividend-paying stock include Walmart (WMT) Johnson & Johnson (JNJ), International Business Machines (IBM), Merck & Co. (MRK), Procter & Gamble Co. (PG) and McDonald’s (MCD).

Here’s a look at dividend payments paid out by JNJ.

dividends dividends
Source: Morningstar

If you held WMT in 2017, therefore, you would have received over $2.04 per share in dividend payments. For example, assume you bought 100 shares of WMT as an investment on February 1, 2017 for $66 per share.

dividends

Therefore, assuming you did not sell those shares, you would have gained $204 in dividends, and nearly $2K in unrealized profits due to WMT’s impressive run higher.

Companies that issue dividends may have less growth potential than less-established companies that reinvest profits into growing and stabilizing the business; the more a company matures, the more it typically wants to reward and attract investors through dividend payments.

Final thoughts

If you’re looking for to receive passive income, you might want to look at stocks that pay dividends. Be mindful of whether corporate earnings are stable and that the dividend payout and amount are appropriate relative to the company’s earnings, for as much as investors love nothing better than cash, they hate nothing more than a dividend cut.

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Petra Hess runs PetraPicks.com. She is a technical swing trader and long-term investor in domestic and Canadian stocks and ETFs.

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