I have talked about dividend investing a lot on this site and all over my socials but what I have not discussed yet is the types of dividends you can receive. This is very important when it comes to dividend investing. Whether you are a seasoned investor or just starting out, I hope this article helps you and gives you a lot of insight to this type of investing.
What is Dividend Investing?
I covered this in a different article, but I will go over it briefly. If you would like to check out the article, you can find it HERE.
Dividend investing is my favorite kind of investing. It is an excellent strategy for those who wish to beef up their retirement earnings. I contribute to my 401(K) account that my job provides but I also have a Roth IRA account that I use to dividend invest. With both of these accounts, I set for my retirement.
Companies will pay you to own their stocks. For example, you buy a stock from company XYZ and they pay you $0.25 per quarter to own that share. At the end of the year, you will earn $1. Now, imagine buying 100 shares of this company, which is $25, every quarter and $100 per year. Not bad for starting out. The company uses a portion of its profits to pay you, the shareholder.
Dividends Increase a Stock’s Total Return
Dividends are a part of a stocks total return. They measure the true value an investor receives from the company over a period, usually quarterly. A good example would the well know company Pepsi (PEP). Their share price grew 4%. Its start price for each share was $173.71 and closed the year out with $180.66. 180.66-173.71 = 6.95 | 6.95/173.71 = 0.04, or 4%
They paid a dividend yield average of 2.65%. To get the total return you add it to the share price growth. That makes the total return of 6.65%. (4% + 2.65% = 6.65%)
What Are the Different Types of Dividends?
The most common type of dividend is a cash dividend. However, there are special dividends, stock dividends, hybrid dividends, and asset dividends.
This is the most common type of dividend. Pespi in the example above or even Coca-Cola will pay out a cash dividend. This as the name says, cash that is deposited into your brokerage account that you own the stock in. The frequency of payments depends on the company. Some companies pay monthly, quarterly, semi-annual and annually.
A bonus to this is that some companies will allow you to automatically reinvest your dividend earnings back and earn more shares. However, some companies require enough dividend earnings to buy a full share while others offer fractional shares. I highly recommend you reinvest your dividends so your portfolio will grow. I do this with mine so I do not have to worry about doing it myself.
A special dividend is when the company issues a dividend payment outside their normal schedule. This is usually the case when the company finds itself with excess cash than they were expecting. Very good thing to see pop up on your portfolio.
This kind of dividend is different than cash dividends in the fact instead of cash, you will receive a new share of the company. The number you receive depends on the number of shares you already own. Paid out pro rata.
This kind of dividend pays you out in the form of cash and stock. Allow me to explain with an example. Company XYZ will announce a dividend of 15 cents plus an extra 10% of shares owned. If you had 100 shares in the company, you will get $15 back as a cash dividend and an additional 10 shares in the company
This kind of dividend is odd and you do not see it too often. The company will reward you through tangible assets. These can be investment securities, real estate or physical assets.
How Do Stock Buybacks Differ from Dividend Payments?
A buyback is the company’s way of increasing their share value. If a company has 1 million shares in the world and their share price is $25, by buying let us say 250,000 shares back, the company reduced the pool of shares and because of this, their price will jump to $31.25.
These are different from dividends because the company pays you out with cash from the company’s balance sheet. The company’s normal operating budget is used to pay you out and repurchases the stock.
Is One Kind of Dividend Preferable to Another?
This all depends on your investment strategy. Depending on where you are in life, your age and what you want to achieve, the type can vary. For example, I am 33 and will be 34 years old in December. This means I want cash dividends because I want to use that money to reinvest so when retirement comes I have a good investment portfolio.
Now, if you are young and starting out you might enjoy a hybrid model or you might want the company to pay you in shares. You can always change your goals down the road and adjust depending on your investments, age and income.
However, keep in mind that the majority of dividends are paid out in cash. I suggest reinvesting them.