Dividends: Knowing How They Work and Their Value

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There are investors who undervalue or neglect the importance of dividends when it comes to stock market investing. A lot of investors tend to view these as little bonuses correlated with buying stocks.

In this article, you can uncover both the importance of dividends and how they work to help investors.

 

What are dividends?

A dividend is a form of payment distributed by a company to its shareholders. It can be in the form of cash payments, shares of stock or even other properties. It is being decided by the company’s board of directors.

In simple terms, dividends are shares of an investor out of the total earnings of a company. It is one way for investors to gain profit via stock ownership.

 

How are dividends distributed?

Companies that usually issues dividends can choose from a wide array of methods in distributing such to its stockholders such as:

  • Stable Dividend Policy

 

This follows steady dividend payouts unmindful of the present corporate earnings.

 

  • Target Payout Ratio

 

This means that there is a certain measure on the size of the dividends of a company. This is usually determined through a stable dividend policy. In here, the goal of the company is to pay a specified percentage out of its earnings.

 

  • Constant Payout Ratio

 

With constant payout ratio, a company chooses a specific percentage out of its yearly earnings as dividends. Thus, dividends vary accordingly, based on earnings.

  • Residual Dividend Model

 

In this model, a certain company’s dividends are centered on its total earnings minus the funds required by the company to finance and run its equity portion of its capital budget. The remaining profits are the ones being paid out to shareholders.

 

What are the usual companies that issue dividends?

Actually, larger and established companies are the ones capable of issuing regular dividends to their shareholders. They would like to be of support as their shareholders increases their wealth. However, the same cannot apply to startup companies and those belonging to the technology or biotechnology sectors since their profits are being reinvested to carry on growth and expansion.

Looking from history and records, the following sectors and industries have been known to have the highest dividend distributed to shareholders:

  • Basic materials
  • Oil and gas
  • Banks and financial
  • Healthcare and pharmaceuticals
  • Utilities
  • REITS

 

How can dividends be advantageous?

 

There are several countries where investors belonging to the high marginal tax brackets invest on dividend-paying stocks to take advantage of a more favorable tax rate.

Dividends can also be a sign of a company’s health status. If a certain company normally gives dividend payouts, and is now on the verge of reducing or eliminating such, it can be a good indicator to investors that such company might be in trouble. Another one, too, is when the dividend rate becomes high suddenly; it can be a great signal that the company is performing positively in the market.

 

Dividend-paying stocks also have the ability to stand-out in a bear market. Hence, investors can have somewhat a good protection if they chose to invest in dividend-paying companies.

Moreover, dividends help conserve the purchasing power of capital for investors. There are usually annual income returns that can beat the effect of inflation.

 

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Is Inflation Something to be Dreaded About?

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Inflation is indeed an extremely debated topic in economics. There are different points of view stating that inflation is just a phenomenon that drags the economy down – making everything harder and riskier.

Inflation is usually described as the sustained rise in prices of goods and services in a certain country. Its triggering point is – the value of money falls. If the prices of things keep on increasing and is making everything more difficult, then, is inflation something to be really dreaded about?

Or does it bring its own benefits, too?

 

Inflation is actually good for the economy

In cases that the economy is not running fully due to deflation (i.e. rise in unemployment and unused resources), inflation can help turn the tables. When the economy has been stuck in a period of recession, a higher rate of inflation can help it recover, thus, boosting its economic growth.

Moreover, when the prices of goods and services are falling (deflation), people are becoming unwilling to spend their money since they are thinking that prices can get cheaper sooner or later, hence, it leads them to delay purchases. If this happens, it can have an adverse domino effect to demand, then affecting production, distressing employment rate which may further lead to layoffs, and worst, a weakening and failing economy.

On the other hand, inflation boosts consumption. If you know that items are more likely to rise by 2-3% in a year, then you can be urged to purchase it now since buying it after some time can most likely increase its price.

 

Inflation essentially increases wages

If the price of goods and services continue to increase in the market, employers find it easier to adjust and increase wages. In turn, employee productivity increases since there is an increase in the workers’ morale. Rise in wages can be attributed to inflation.

 

Inflation in fact aids debtors

Inflation is a great help to people with current debts and are repaying their loans. With inflation peaking, wages of people can increase fast as well. To put it simply, loan payments become less valuable since it is taking a smaller portion of a person’s income. Quite the reverse of deflation or falling of prices – it actually intensifies the value of loans.

 

A good example is the United States, which is known as the leading debtor in the world, inflation helps reduce the impact of its massive debt.

 

Inflation is favorable if it is 2-3% a year

Economists argue that a little does of inflation is vital to promote economic growth and to stabilize the economy. The considered healthy rate of inflation is 2-3% per year. As examined in this article, inflation can still be considered positive since it can result to wage growth. It can also lead to profitability of businesses due to a continued flow in their capital.

 

Inflation is a constructive phenomenon as long as the factors being considered such as employment, business growth, and wage concerns are moving up altogether in unison.

 

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Earnings Release Week

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This week will be a busy week up ahead for the market community, a lot will be put in the spotlight but the one thing that will stand out is the geopolitical turmoil the US created after the strikes it made in Syria last week.

Financial Institutions and Banks

This will be the first of the big weeks in the financial market, and for this week, all the highlights are focused on the top financial institutions and banks. The scheduled reports for this week, this Thursday, are from prominent banks and financial institutions JPMorgan Chase & Co, Wells Fargo & Co, and Citigroup Inc.

The banks have been on a rollercoaster of a ride from the past months under the new Trump administration. Some other factors that may have triggered the fiscal stimulus hopes for the financial institutions are; deregulations talks and the Fed’s decision to be sterner and hiking the interest rate for a couple of times this week.

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Inflation off The Bat

There will also a big debacle for Friday because of the exclusive inflation data that will be unveiled; the data include whole March’s progress. With the Fed’s recent hikes and its latest meeting last Wednesday hinted that if the inflation data continue to roll, the central bank may and will increase another three or four interest hikes this year.

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G-7 Meets in Italy

The G-7 is a group of countries that consists of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. These countries have started a 2-day summit meeting today in Italy after the alarming attack the US made against Syria, investors and the market community continues to keep track on what would happen in the growing geopolitical crisis.

Then entirety of the 2-day meeting is expected to be disclosed at a press conference dated this coming Tuesday Eastern Time.

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Geopolitical Tremors Weakens the Dollar

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The recent missile strikes launched by the United States at an airbase in Homs, Syria yesterday that allegedly carried chemical weapons brings a bit of distraught on the greenback making it a bit weaker against its blooming rival, the yen.

The yes opens the Asian trading session today trading at 110.40 against the US currency. A relevantly weaker against the Japanese safe heaven, the yen continues to flourish even with the high risk of aversion in its current state and environment.

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Dollar Weaker Against Currencies

The US currency also loses its previous gained momentum; it is continuous to weaken against a basket of currency trading at 100.64 at Asian midday trading. The greenback, yesterday, inches higher amongst every other currency because of the positive data coming from March’s employment rate.

The current geopolitical turmoil brought the 59 Tomahawk missiles launched by the US navy warships in the eastern Mediterranean Sea. Recent reports and news provided that the multiple strikes targets are mainly airstrips, aircraft and fuel stations on the Shayrat Air Base.

According to the President of Syria on a press conference with King Abdullah II of Jordan “What happened yesterday is unacceptable to me,” He also mentioned that the attack had crossed a lot of lines “beyond red-line.”

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Yen Pressures Several Currencies        

The yen also pushes other dollars such as the Australian and New Zealand dollar to the brink, even with the risk of aversion. The yen also puts several pressures on both dollars; the Aussie was trading around at 83.09, after having an all-time high at 83.7, albeit the New Zealand is trading at 76.89 after being up at flat 77 last seen yesterday.

On the other hand, the euro was down a little bit on the day at $10.643, after more steams coming from the European Central Bank President Mario Draghi. The currency now sits at a three-week low of $1.0629 overnight, it is currently down as much as 0.1% for the whole week.

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Dollar Surges From March’s Employment Rate

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The dollar finally caught a bit of silver lining from the private sector’s data for their employment rate for March this year. It is the first time in four days that the dollar eases after a huge decline from economic uncertainties the new administration poses.

Dollar Strengthens Amidst Employment Rate

The data from National Employment Report shows that a total of new 187,000 jobs and with estimates ranging from 110,000 to 225,000. The greenback saw an increase that topples the euro and the Swiss franc as the European political crisis rouses. But the dollar creeps inches closer against pounds.

According to Marvin Loh, the senior global markets strategist at BNY Mellon in Boston “The release of the minutes from the March FOMC meeting provided a dose of hawkish rhetoric following what has been mostly perceived as a dovish hike from the March 15th meeting,” Loh also added that the Fed portfolio was a bit of the shock for the market, the eventual reduction took everyone by surprise.

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Dollar Index Increases

The dollar index is the one that tracks the US currency against a basket of currency was trading at flat 100.54, while the dollar rose as much as 0.2 percent against the yen at 111.39. The yen has been looking at 3-weeks high against the dollar but loses momentum today because of the positive employment rate from the private sectors.

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Investing Dictionary #4: Federal Funds

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The Federal Funds or just Fed Funds in some cases are the excess reserves that the commercial banks and other financial institutions deposit at regional Federal Reserve Banks. According to Investopedia, these funds can be lent, then, to other market participants with insufficient cash on hand to meet their lending and reserve needs. The loans are unsecured and are made at a relatively low-interest rate, called the federal fund’s rate or overnight rate, as that is the period for which most such loans are made.

All You Need To Know About Federal Funds?

More from the Federal Funds, these fed funds are present to guide the country’s commercial banks to meet their daily reserve requirements which are equaled to the money banks are required to maintain at their regional Federal Reserve.

Among the regional banks, the Fed is the one that sets a set target rate or range for the fund’s rate; this means that the target set for each region can vary. One more thing about the set rate or target is, it is adjusted periodically based on economic and monetary conditions.

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Federal Funds and Interest Rates

Interest rates are the means the Federal Reserve uses in the open market operations to manage the supply of money in the economy. The Fed funds and the Interest Rates are highly related, they have a lot much in common when it comes to the broader market. The Federal Reserve task is to announce the effective fund’s rate at the end of each trading, which in return set the weight of the average rate for all transactions in the market day.

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Leverages and Margins

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Leverages and margins are two words that are always on the sites of forex companies and anything forex. Those words are really out there, it is hard not to come across them because they are the fundamentals and probably some of the backbones of forex trading.

What are Margins?

Margins will be the first one to tackle; one of the things that you have to remember about margins is that it is comparable to borrowed money. Margins are acquired via borrowing it from your broker, and then these margins that were borrowed are used to purchase some stocks.

To understand more about margins, traders usually use them to buy more stocks. When traders don’t normally have the means to buy, margins equals to more stocks but they are actually borrowed to be paid later.

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What are Leverages?

Leverages are the actual financial instruments every trader use, they are also borrowed capital or also known as margins. In retrospective, leverages are used to boost the potential of an investment made. Leverages are heavily present and mostly seen in real estate’s arrangements through the form of mortgages; these mortgages are then used to purchase a home.

These two works hand in hand, leverages are usually the first to learn if you want to start trading and looking forward to the knowledge of having margins. Having the perfect and accurate knowledge of leverages and margins so you can use them to your advantages for the success of your trading.

Trade12Basics is a daily updated blog about the happenings in the stock market, financial realms, and the world economy. It is also a place to find basics in trading and other sorts of tutorials that you can add to your knowledge. Subscribe to further educate yourself about the field that you are to partake in. Trade12Basics  is here for you!