When you invest in the stock market, capital appreciation (waiting for the price to go up) is only one way to make money. The other is through dividends.
When established, highly profitable companies generate more cash than they need to reinvest in their own growth, they often choose to distribute a portion of those earnings directly to their shareholders.
Before you start building a passive income portfolio, you need to understand the mechanics that dictate these payouts:
๐ Dividend Yield: This is your annual return on investment based on the current share price. If a stock costs $100 and pays $5 a year in dividends, the yield is 5%.
๐ Payout Ratio: A massive yield might look attractive, but you must check the payout ratio. The percentage of total company earnings being paid out. If a company is paying out 95% of its profits just to maintain its dividend, that payout is highly vulnerable to being cut during a bad quarter.
๐ The Ex-Dividend Date: This is the ultimate deadline. To receive an upcoming dividend payment, you must purchase the stock before the ex-dividend date. If you buy the stock on or after this date, the previous owner gets the cash.
Read our complete guide to evaluating dividend stocks.
When established, highly profitable companies generate more cash than they need to reinvest in their own growth, they often choose to distribute a portion of those earnings directly to their shareholders.
Before you start building a passive income portfolio, you need to understand the mechanics that dictate these payouts:
๐ Dividend Yield: This is your annual return on investment based on the current share price. If a stock costs $100 and pays $5 a year in dividends, the yield is 5%.
๐ Payout Ratio: A massive yield might look attractive, but you must check the payout ratio. The percentage of total company earnings being paid out. If a company is paying out 95% of its profits just to maintain its dividend, that payout is highly vulnerable to being cut during a bad quarter.
๐ The Ex-Dividend Date: This is the ultimate deadline. To receive an upcoming dividend payment, you must purchase the stock before the ex-dividend date. If you buy the stock on or after this date, the previous owner gets the cash.
Read our complete guide to evaluating dividend stocks.