Why are dividends so important?
Dividends are income derives from shares (equities, stocks) that are paid to the holder of those shares. Companies make profit and as a result pay this income back to their shareholders and by being a shareholder you can directly benefit by receiving a share of company profits.
Not all dividends are created equal
Some companies pay nothing, zip, nothing, 0% on their shares. Companies such as Google don’t actually pay and dividends, but many companies do pay dividends. The dividend yield is the direct measure of how much a given share pays out to the shareholder in terms of a percentage. One company could pay 2% and another 20%. The range is enormous and each company offers its own set of advantages and disadvantages. Thats why research on each company is important and of course to align with your own income.investment objectives.
Income from Dividends
With bank accounts paying tiny interest rates and the record low interest rates it simply makes no sense to rely on cash savings for income. Even property investments suffer from low returns as investor use cheap mortgages to chase every spiralling and overpriced properties. Thats why dividends can provide a smart way to get income yields much greater than property or bank accounts. Even household names such as Astrazeneca and GlaxoSmithKline (GSK) offer incomes per year of 4% and 5%. But some mining companies such as Antofagasta offer 7%, so for every £1000 invested you make around £70 a year. Try asking your bank to provide you with 7% in income a year. Obviously there is risk to your capital but the point being there is also risk in property too - prices can rise and mortgages can be more expensive.
How to buy dividends
You need a share dealing account so you can purchase shares that pay dividends. There are many companies you can choose from to perform share dealing, and whilst there are high street banks that offer share dealing accounts you are often better saving money and using an online brokerage. Halifax have one division called IWebshareDealing which offers cheap purchasing of shares from £5 per share. Other Services such as TD Waterhouse provide online share dealing at a cost effective level.
Hold Shares in an ISA
You can even hold shares in a TAX wrapper, however the income can still be taxable but underlying gains in share price are at least tax free - so for many investors this provides a very lucrative and smart way to invest in Dividends. The ISA limit is now £15,000 so you could purchase this amount of shares each and every year.