What Is a Dividend and How Do They Work?

For the past 3 months, I have been obsessed with the stock market and figuring out different ways to make money using the stock market. One efficient way to make a passive income using the stock market is to invest in dividend paying companies.

What is a dividend?

Dividend: a payment a company makes to share profits with its stockholders. Companies pay dividend yearly, monthly, or quarterly. You will receive that dividend no matter if the stock is up or down.

How to find the dividend for a company?

Seeking Alpha is a great resource for any company research! In this photo, is the dividend summary and last announced divided for Coca-Cola (KO). When trying to decipher between companies to invest in for their dividend focus on:

Dividend Yield

Dividend Growth

Dividend Frequency

What is the dividend yield?

The dividend yield a percentage that represents the amount of money a company pays shareholders for owning a share of its stocks.

Safe dividend yield: above 1.5%-4%

Risky dividend yield: 5%-9%

Super risky dividend yield: above 10%

How do dividends work?

Yearly

If you own 4 shares of a company that pays $0.15 yearly per share in dividends, you will receive $.60 per year from that company

Monthly

If you own 4 shares of a company that pays $0.15 monthly per share in dividends, you will receive $0.60 a month

Yearly total: $7.20

Quarterly

If you own 4 shares of a company that pays $0.15 quarterly in dividends you will receive $0.60 quarterly (4 times a year)

Yearly total: $2.40

How do you know what companies to invest in to receive a dividend?

Look at the Dividend Aristocrats (Safe bet): companies who have increased their dividend for at least 25 consecutive years

Companies:

  • AT&T Inc. (T)
  • Atmos Energy (ATO)
  • Becton, Dickinson, & Company (BDX)
  • Roper Technologies (ROP)
  • AbbVie (ABBV)
  • S&P Global Inc. (SPGI)

Look at the Dividend Kings (safest bet): increased dividend for the last 50 years consecutively

Companies:

  • Black Hills Corp. (BKH) sector: utilities
  • Federal Realty Investment Trust (FRT) sector: real estate
  • 3M Company (MMM) sector: industrial
  • Johnson & Johnson (JNJ) sector: healthcare
  • Farmers & Merchants Bancorp (FMCB) sector: financial services
  • National Fuel Gas (NFG) sector: energy
  • The Coca-Cola Company (KO) sector: consumer defensive
  • Lowe’s Companies (LOW) sector: consumer cyclical
  • Stepan (SCL) sector: basic materials

REITS (real estate investment trusts): are required to distribute 90% of its taxable earnings – most will distribute at least 100% of their taxable earnings to fully utilize the dividends paid deduction and not have corporate income tax

List of REITS

  • American Tower (AMT)
  • Equity LifeStyle Properties (ELS)
  • Americold Realty Trust (COLD)
  • Innovative Industrial Properties (IIPR)

*Disclosure: this information is meant to be used for educational purposes only. do not make any investment until you have done your due diligence

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