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How to harness the power of dividends

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Money for nothing. Dire Straits sang about it, everyone dreams about it and dividends are surely the closest thing to it.

Dividends are a portion of a company’s profit paid to shareholders. The payment amount is based on the number of shares a person holds.

Dividends are commonly paid by companies twice during a year – an interim dividend halfway through the year and a final dividend at the end of the financial year.

However, some companies can pay dividends more or less frequently, and some don’t pay any dividends at all. These companies may not have made a profit or have decided to reinvest the money back into the growth of the business.

Dividends and investing
Dividends are commonly paid by companies twice during a year. Photo: Getty

Dividends can give investors a way to boost their income without working for it. By investing in stocks that pay healthy dividends, investors can enjoy healthy capital growth as well as a passive income.

But dividend investing requires diligent research. Take a closer look at a stock to determine if it has a strong dividend history and solid long-term growth prospects. To find examples, you only have to turn to the Dividend Aristocrats.

A Dividend Aristocrat is a company in the S&P 500 that has paid and increased its base dividend every year for at least 25 consecutive years. These include household names such as Coca Cola, Target and McDonalds.

Dividend investing can also be done with exchange-traded funds or ETFs.

Either way, dividend investing is a long term play. Short-term investing presents many “volatility risks” and dividends are most valuable when they accrue over long periods of time.

Unlike bonds, companies are not required to pay dividends, and during times of financial strain some dividends may be reduced or suspended.

This has been the case during the global pandemic, where many companies, in particular in the travel, leisure, oil and gas industries, decided to cut their dividend payouts to make internal ends meet.

Investors should be aware of this, and it’s crucial that they proceed with caution and do their research before investing.

Dividend stocks can be a valuable way to earn extra profit and for many investors, it’s the icing on the cake.

Research your dividend options at online trading platform eToro where you can trade top stocks and ETFs.