eToro Post a Helpful Guide to Dividends

This content does not apply to US customers

If you were looking to do some trading this week, eToro have a helpful guide to help you understand one of the more frequently occurring rewards for traders, dividends.

As a platform with multi-faceted trading abilities, eToro always aims to provide their traders with guides that can assist them. With this considered, this guide to dividends will be especially helpful if you are interested in trading stocks – as these are where they are most commonly found. The concept of dividends is fairly simple. In a nutshell, they are a reward from a company to a stockholder for choosing to invest and own part of the company. These rewards are typically a percentage of the company’s profits.

As an investor or stakeholder in the company, you are partly an owner and therefore are entitled to the profit. In many cases though, this profit would not be regularly paid out, as it would make more sense, particularly for growing businesses, to reinvest the profit into the company or use it to further the company’s ventures. This means that if the company grows, your investment will be worth more, which is, of course, beneficial to you as an investor.

However, when that company you have invested in grows to a particular size, or you simply have invested a lot in a big company, they pay out a share of these profits- these are known as dividends. The value of these dividends and the frequency in which they will be shared out will depend on the specific company. They can happen on a quarterly, bi-yearly, or yearly basis. This is scheduled by the company in their earnings reports and this will detail the particulars of the dividends if there are any.

If dividends are given out, they will be reflective of the stakes you own, with the amounts distributed- in the form of cash or stock- being reflective of the number of shares you own. eToro shared this example, “If Apple announces a dividend of $0.8 per share, a stockholder with 50 shares will receive a $40 dividend.” And so, the more stocks you own, the more dividends you will stand to earn if and when the company decides to distribute them.  

As such, dividends can be thought of being a sort of bonus for investing and showing belief in the company that does not affect your existing investment, which would stay the same. The dividends working as a reward on top of the capital gains earned by your stock’s value increasing. Due to this, dividends are becoming more frequently sought after among the investor community – particularly, according to eToro, those with a “low-risk appetite”, who “are looking for long-term growth”, and who “base at least some of their stock portfolio on dividend-yielding stocks.”

The question now would be, what should you do with your dividends? Well, the size of the dividends factors into deciding exactly what options are available to you. However, eToro highlight one avenue available to you, which is to reinvest the dividends. This will appeal to a number of investors who have a bigger appetite for the risk and are looking to use dividends as a means to further grow their portfolio and use them as a means of steady income.

This can be easily managed thanks to the use of eToro’s DividendGrowth Portfolio, which has been designed reflective of companies that have been giving out regular dividends over the past 20 years. These include the likes of Pepsico, IBM, and McDonald’s, with the following criteria taken into account:

• Market cap – looking for solid companies.
• Beta – low market volatility.
• 5-year dividend growth average – looking at consistency over the medium term.
• Previous year dividend yield – short term dividend performance.

The portfolio is described as a “well-rounded, long-term and low-risk investment solution for dividend-hungry investors” so if you are keen to get more closely involved with dividends that you should hunt this out at eToro.