What are dividends?
Dividends are a sum of money paid by a company to its shareholders out of its profits. The board of directors or the management of a company may decide to reinvest the profits made, or to pay part of its profit in the form of dividends to their shareholders.
The amount of the payment may change from one year to another, depending on the company's profit or the investment opportunities. Some companies even stop paying dividends in certain situations.
Less and less companies pay dividends, in general, those who do, are full grown companies that are no longer focused on growth.
Dividend yield:
The return of a company's dividends is equal to the ratio between the value of the annual dividends (per share) and the price of the shares.
Let's say the stock price of a company is 100 $ and the annual dividend is 2 $. At this action we have a 2% yield.
The yield of a company's dividends can tell you a lot. Most companie's payments often increase over time but generally remain within the same range.
I'll go back to the example above. Let's say the share price rises from 100 $ to 200 $ and the dividend remains 2 $. You will now have a 1% yield.
What does that tell you? Well, I can say that a very low-yielding share is too expensive to invest in. The company is overstated or vice versa.
How to invest in high yield dividends:
There are two ways
If you have experience in the stock market and you know how to choose your own companies to invest in, you can use a stock screener and filter a dividend yield. HERE
Invest in an ETF focused on dividend companies, such as the Vanguard High Dividend Yield Index Fund, it's an ETF, a stock-market fund that invests the available capital after a particular strategy or targets a certain stock index.
Here's a list with the best ETFs
Dividends as passive income:
Some investors use strategies that target dividend yield by investing in companies that have a history of stable distributions to their shareholders.
Using such a strategy, you should keep in mind that the total return on investment also depends on the evolution of the stock price, not only on the dividend yield.
One more example of how it works:
You buy ten shares at 100 $ for a company that pays dividends of 2 $ per share. If after one year the share price remained at the same level, the total return of investment is equal to the dividend yield, 2%. If the stock price rises to 150 $, the total return on the investment will be 52%, and if the stock price drops to 50 $, you'll have a 48% loss.
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