Many investors are attracted to the markets hoping for nice, quick profits. Perhaps they’re punting on the latest stock tip, or trying to pick the next hottest sector.
While that approach might work some of the time, professionals approach the market from a different angle. They know it’s the money a company generates that ultimately determines its value.
What are dividend stocks?
Think of it from your own perspective. If you were buying a business, you’re likely to be more interested in one that’s making a profit, than one running at a loss. Well, professional fund managers are no different. They’re on the hunt for profitable companies that pay them an income.
Companies pay this income via dividends. Typically, a blue-chip stock pays out two dividends a year. The more profit a company makes, the bigger the size of the dividends it can distribute to its shareholders.
What companies pay dividend stocks?
Companies growing quickly might generate some short term profits if you want to trade in and out of them. However, they need to keep a tight hold on their cash to help fund their businesses. Pick the wrong stock and you’ll not only miss out on dividends, but potentially lose money on the trade as well.
Mature businesses, like bank stocks for example, are already well established and are able to share more of their profits with their shareholders. You’ll often hear this referred to as yield investing. Investors look at how much income they’ll make from dividends, given the size of their investment.
Another attraction of dividend-paying stocks is the stability of the companies that pay them. The most reliable dividend payers are usually the largest companies on the ASX. What’s less known, though, is that most of the companies listed on the ASX don’t pay dividends. They just don’t have the financial firepower to pay them.
Investing in dividend-paying stocks might not be the most exciting way to play the market. However, it can be an excellent way to build both wealth and income over time.