Dividend paying stocks investment guide

Investment principles

The purpose of investing in dividend paying stocks is to obtain profit. It is not a guaranteed investment, but is an option of the investor, trying in this way to better exploit his/her’s available financial resources. Always, on a normal financial market, the risk associated with a higher profitability is in its turn higher. From this point of view, the investor in stocks, must know that the expected profit of an investment in shares does not always occur immediately and depends on many factors of which the most important is the future success of the company in whose shares it invests.

As the risks involved when investing in shares is significantly higher than, for example, investments in money market instruments, it is necessary that the selection of shares to be bought to be made after a detailed analysis that takes into account various factors which may cause positive development of the value of the investment. It is well known that there are two main sources of earnings to shareholders: dividends granted by the issuer and earnings from the growth of trading price of the shares. Dividends are a  distribution of a portion of a company’s earnings, paid regularly (typically annually) by the company, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property. Dividend payments must be approved by the shareholders.

One of the most significant things for the success of dividend paying stocks investments is to establish a time period sufficient enough to be able to reap the benefits of your investment.

Portfolio selection

Four are the main criterias to be considered in setting up a portfolio, in terms of getting in time a stream of passive income from dividends: financial situation of the issuer, the liquidity of the company stocks, the shareholders structure and last, but not least, the position of the company in the economic sector.

  • Financial situation of the issuer: It is the main criteria in the selection of the stocks to be part of a portfolio. A financially strong position is the best guarantee that those shares will not disappear from investors’ attention. Financial situation analysis is a complex process whose aim consists in finding some synthetic indicators that can express how investors evaluate the financial condition of the issuer.
  • Liquidity: refers to the volume of stock trading that the company made on the stock market. The greater the liquidity, the lower the risk of a significant depreciation of the value of the shares.
  • Shareholders structure: is important due to the fact that only a shareholder structure that allows significant changes in future will allow for an attractive trading rate. For example, the existence of a shareholder owning more than 80% of the shares of the issuer is unlikely to occur other big buyers that would  determine a buying “pressure” so the shares price will increase.
  • Position of the company in the economic sector: in which they operate, is a criterion in choosing a stock or another to be part of the portfolio, due to the fact that always a company that is a leader in its field has better chances to be in the attention of investors (liquidity increased), to be characterized by enhanced opportunities to maintain a long-time profitability (possibility of dividend payments) as well as being a favorite target for the large investors – such investment funds – ( possibility of favorable trading price).

Here are some tips that you should keep in mind when investing in stocks:

  • Diversify your investments: it is well known that a diversified portfolio leads to a greater safety of your investment. However do not invest sums that does not deserve to be tracked just for the sake of having diversification.
  • Invest on long-term
  • Accept the idea that you can take wrong decisions: do not try to make yourself to not see signs of a wrong investment, hoping that maybe the investment will recover. If things go from bad to worse and you do not take urgent measures, you might find yourself in the situation of not having what measures to take. It is better to accept a small loss that you can recover from other investments.
  • Do not invest based on tips or “reliable information: besides that transactions based on confidential information are illegal, sure it’s just that nothing is “sure”

Enjoy this blog? Please spread the word :)