In the stock markets, investor returns come in two forms. The first are capital gains: profits made by selling stocks at prices higher than buying prices. However, because stock values move up and down, capital gains are by no means guaranteed. Indeed that FTSE 100 The index is lower today than in January 2018, so that the index has actually declined in the last 3½ years. The second return comes from dividends: regular cash earnings that companies pay out to shareholders. Again, dividends are not guaranteed and can be canceled, suspended or reduced at any time. Due to the Covid-19 pandemic, 2020 saw the UK’s biggest dividend cut in a decade.
Joy in dividends
As a value investor for over 35 years, I love my dividends. To me, they’re the closest thing I’ve ever had to free money. Of course, I’m not the first investor to appreciate them. American business tycoon John D. Rockefeller once said: “You know the only thing that gives me pleasure? It’s about seeing my dividends flow in. “
Investment guru Benjamin Graham, father of value investing and mentor to US billionaire Warren Buffett, was also a big fan. In his 1949 book The Intelligent Investor, Graham said, “The real investor … will do better if he forgets about the stock market and is mindful of its dividend yields and the operating results of its companies. ”As a result, Graham advises investors to ignore stock prices and focus on underlying company performance and cash payments.
So grab this money
To earn dividends, you must first be a shareholder. So that means buying stocks and holding them until the next payout is made. Two dates are important in this process. The first is the ex-div date, the day you are no longer entitled to the upcoming dividend. So buy on this date and you won’t get the next payout. Buy the day before and you’re done. The second is the payment date, which is usually between two weeks and two months after the ex-div date.
The story goes on
There are currently almost 2,000 companies in the main market London Stock Exchange (the LSE). This number has been falling for years (in 2015 it was just under 2,500). However, most of these LSE-listed companies do not pay out cash to shareholders. Some are making losses and unable to fund shareholders’ payouts. Others reinvest their profits to generate future growth.
Build a passive income
One way to start building a regular passive income is to buy shares in dividend companies. But UK corporate dividend distribution is highly concentrated. According to investment group AJ Bell, only 10 FTSE 100 Stocks made up more than half (54%) of 2020 dividends. Likewise, AJ Bell estimates the top 20 payers account for three quarters (75%) of 2020 dividends.
Finally, if you don’t have the time, patience, or experience to pick your own corporate dividends, then this is the one iShares UK Dividend UCITS ETF (LSE: IUKD) can do this for you. This exchange traded fund owns stakes in 50 of the largest dividend payers in the FTSE 350 Index. His top 10 holdings are all large, well-known companies. I owned this stock until the 2007-09 global financial crisis. Today I added it to my buy watchlist as another contender for growing my family’s dividends!
How Stock Dividends Build Huge Residual Income first appeared on The Motley Fool UK.
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Cliffdarcy has no position in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. Views about the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make on our subscription services such as Share Advisor, Hidden Winners, and Pro. At The Motley Fool, we believe that taking a variety of insights into account makes us better investors.
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