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Stock Market Basics for Dividend Investing

By Edited Nov 13, 2013 1 1

One of the stock market basics is that investors who are looking to make a stable income from their investments are often drawn towards dividend investing. There is inherently less volatility in dividend payouts than there is in share prices, and this stability is important for those looking for an investment in which the returns will be an income source. While the dramatic swings in fortune that can occur in other methods of investing, such as options or commodities, may be enticing, more conservative investors know that slow and sure wins the race.

That said, other stock market basics still apply to dividend investing. Like anything related to stocks, dividends from dividend paying stocks can and do change over time. Sometimes it is unavoidable that a company stop paying dividends because of poor performance or legal issues involved with debt. In the world of investing, there isn't such a thing as a sure thing. Losses can and do happen. But for the most part ,Corporations which pay dividends try to keep the payouts stable, because they know that the investors looking for dividends tend to favor the reliable and steady income. So when choosing between dividend paying stocks, make sure to research the history of the companies payouts, as well as to research the other stock market basics to forecast for the future of the company.

While one stock may offer a larger dividend than another, if it costs more to buy then which actually offers the best value to the dividend focused investor? When looking at the different dividend paying stocks, it is important to be able to calculate the dividend yield of each offering so that you can compare between them for the best fit for your portfolio. The dividend yield normalizes for the price of shares and payout frequency so that these factors do not cloud the issue of which stocks return the highest rates. The equation to do this is quite simple really, but just because it's easy to learn doesn't mean it's not a valuable tool in the investors toolbox. Simply divide the dividend payout (historically) by the current share price. If the stocks being compared pay dividends on different payout schedules, then normalize by time by dividing by the number of days between payouts.

Another of the stock market basics that apply to dividend investing is that dividends are not always paid out on the same schedule. There are even dividends which aren't paid out regularly, called "one time" dividends. These may be made for a number of reasons, be it a new acquisition or sale, or even for tax reasons. Given the unpredictability of one time dividends, they can't be counted on or included as a plus or minus for any given stock. But it is important to realize that they can and sometimes do happen.

Not only do dividend paying stocks sometimes vary in the periods between when dividends are paid out, but they can even vary in what manner of payout is made. Most dividends are paid as cash or stock, but they can actually be any form of payout. This could be in the form of a commodity or product the company owns in fact. So be careful when looking for dividends and make sure the company pays their dividends in a form you are interested in. Bear in mind these stock market basics in regards to dividend investing, and you'll be well on your way to understanding how a stable income can be derived from an unstable market.


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Comments

Jan 13, 2011 12:35am
southerngirl09
Thanks for sharing this information. Once I have accumulated sufficient passive income from writing online, I am thinking of investing it in stocks that pay good dividends.
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