Dividend Payments & More
As we mentioned, the dividends get paid either monthly, quarterly, or annually. The company with dividend payment pays you a certain amount for each share that you own.For instance, if you own 100 shares of stock and the company pays $0.30 per share quarterly, you will get a payout of $30 per quarter.
The amount the dividend pays is also called a yield. This is how you calculate it:
Amount paid per share x 4 (quarters) = yearly payment per share
Then divide that payment by the current share price of the company = dividend yield%
In our example, this would look like this:
$0.30 x 4 = $1.20
$1.20 / $20 = 6%
It is great to know the dividend yield since the higher it is, the more you will get per share. But the high yield also serves as a caution.
If the company is paying out more than it is worth, it might be too good to be true. This means that the price of the company's stock has gone down, and the dividend might be cut or the company might stop it altogether. So you need to look carefully at the yield and the rest of the company's finances.
I like to look at the yield in combination with the dividend amount per share. I first look at that number and then check the yield to see where it lands.
My diviend income over the years after I found out what dividends were:
My dividend income in 2021?$2,727.67
My dividend income in 2022?
$4,390.76
My dividend income in 2023?
$9,510.24
My dividend income in 2024?
$17,878.10
My dividend income in 2025?
$25,747.45
My dividend income in 2026?
Can't wait to see
The snowball is rolling!
Things to consider for dividend investing:
- Expense Ratios - When investing in funds that pay dividends, you will be paying a management fee, aka expense ratio. These fees add up over time, so you want to look for a fund with a lower expense ratio to keep more of what you get.
- Dividend Yield - The dividend yield is the annual dividend a company pays its shareholders divided by its current stock price. It helps you evaluate cash flow, compare income against growth, and compare different investment opportunities. Dividend yields change relative to the stock price. The yield can often look unusually high for stocks whose values drop quickly. Hence, it is not always wise to chase the high yield.
- Effective Federal Funds Rate - all yields follow the U.S. interest rate. It is an important number to keep an eye on. If the dividend pays a higher yield than the current fund rate, you will need to take a closer look at its financial stats.
- Company health - Just like you would evaluate a company before buying its shares, the same consideration should be in place for any dividend-paying companies. If it looks too good, the dividend is likely not sustainable. It could also be that the company is doing some financial tweaking to make the shares/dividends look good to investors.
- Dividend health & history- Companies with decades of uninterrupted dividend payments (aka "Dividend Aristocrats" or "Kings") signal financial stability. A sustained history of dividend growth also usually reflects management's confidence in continuous, robust cash flows. This is very important in investing in and getting the dividends from the companies and funds.
You can verify a company's ability to payout it dividend by looking at the payout ratio, which is the proportion of earnings paid as dividends. A lower payout ratio means the company retains enough profit to reinvest in growth and maintain payouts even if earnings drop. - P/E Ratio (Price to Earnings): This tells you how much you are paying for every dollar of profit the company makes. A high P/E means the market expects big growth. A low P/E can mean the stock is undervalued or the business is struggling. Always compare it to others in the same industry, especially if considering putting money in a specific one, as there are peers that would tell a better story.
- EPS (Earnings Per Share This is how much profit the company generates per share of stock. Growing EPS over multiple quarters means the business is getting stronger. Flat or shrinking EPS while the stock price rises is a red flag most people ignore until it is too late.
- Free Cash Flow Earnings can be manipulated. Cash flow is much harder to fake. Free cash flow tells you how much actual money the business generates after paying its bills. Companies with strong free cash flow can buy back stock, pay dividends, and survive downturns. Companies without it are one bad quarter away from trouble.
