Dividends are a niche but popular aspect of investments across the UK and around the world. They are often seen as one of the greatest benefits of investing in stocks or shares, investors across the globe openly looking for an investment option that can provide dividends payments. But what can they can provide investors going forward?
Before we can answer this question, we must understand what dividends are and how they work.
How Dividends Work.
The idea of dividends is relatively simple on the surface – they are a way companies can redistribute profits to its shareholders as a way to thank them for their continued support and help encourage investors to continue to invest going forward. Dividends are not only used to thank investors for ongoing support. The amount that is paid is a way for companies to highlight their success across the financial year. While this may suggest that all companies who receive external investment will pay out when they experience a period of success, it is important to note that mainly companies who are substantially profitable will issue regular dividends payments.
It is important to note that the structure of dividends payment will naturally change from investment to investment. However, payments can often be grouped into two distinct groups. The first of these groups will be cash payments based on how many shares they may have outstanding or the level of their profit. On the other hand, the second form of payment may be issued in the form of additional shares of stock, for example, if a company issues a 10% stock dividend, it an investor has 100 shares initially they will receive ten additional shares.
While the profits from dividends payments can be beneficial, especially if they are regular and consistent, the amount each investor will receive is dependent on their current stake in a company.
What are the benefits of dividends and how can they benefit investors?
Dividends provide investors with a vast array of benefits, depending on the form of investment that is undertaken. While the benefits below may appear to be broad and generic, it is essential to note that investing is not always the best option for everyone. Before any investment is made, you must understand the finer details.
Growth and Expansion
One of the most notable and attractive benefits of investing in dividend-paying companies is the relentless power of dividends driving total returns. Well-established, successful companies will tend to increase their dividend payments to their investors year on year.
Not only does this structure provide investors with growing returns from a single or continued investment, but it also gives investors a chance to obtain some level of returns even if the stock value depreciates. While the performance of an investment will naturally depend on the performance of the stock market, dividend-paying investments partially reduce the risk of losing out, especially in the low-interest-rate environment we find ourselves in. For this very reason, dividend payments are often preferred for fixed-income investments.
Reduced Risk and Volatility.
One of the most prominent issues with any form of investment is the notion of risk. Due to the nature of dividends, they act as a significant factor in reducing the overall level risk associated with an investment portfolio. So how can they help you reduce risk and help you mitigate volatility?
Dividend payments help investors mitigate any potential losses that may occur from a possible decline in stock price or market performance. During dips in the value of a stock or overall market performance, dividend-paying stocks provide investors with some level of fall back. Due to the nature of dividend payments, while the overall stock prices may fall, investors can still receive some form of returns in comparison to their non-dividend counterparts.
This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.