Passive Income Through Dividends

Types of dividends paid can be in the form of cash, stock, property, liquidating, or scrip. Dividend investing can be a great tool for long-term investors seeking the opportunity to build wealth towards retirement or even establish an income stream ie passive income through dividends. Read on to learn about the types of dividends and different dividend investment strategies.

Cash dividends are just what they sound to be, a cash payment to shareholders. Shareholders who own and hold shares before the ex-dividend date will receive cash deposits in the sum of the dividend x the amount of shares they own the next time a dividend is issued. If you own a dividend stock before the dividend date, you may sell the stock at any time after the ex-dividend date and still receive payment for that cycle. Dividends issued by a company can be seen in company info usually listed as a percentage that represents yearly return.

A stock dividend is a dividend that a company pays shareholders but rather than in the form of cash it is made as additional shares of the company. Generally, companies who are experiencing debt of financial hardship will issue a stock dividend rather than a cash one. Stock dividends keep shareholder faith in the company while also allowing the company to maintain cash for operating expenses. The only downside to this type of dividend is that it has the effect of reducing the company’s EPS (earnings per share) by increasing the overall number of shares causing dilution.

Scrip dividends are a little less common in that they function differently than stock or cash dividends. When a company does not have the funds or ability to pay shareholders a dividend they will create notes payable, which is basically like and I-owe-you. These notes payable have a determined period in which the shareholders are promised to be paid their dividends with added interest. Scrip dividends are risky for companies in that they not only reduce the faith of shareholders but also create added debt for the company.

Liquidating dividends are a pretty bad sign for companies in that they generally mean that the company is getting ready to close the doors. When a company issues a liquidating dividend they are issuing a last-ditch dividend to shareholders before shutting down the company completely. These dividends are paid after the said company has paid off any outstanding debts and other obligations.

Property dividends are dividends that are issued to shareholders in the form of physical assets or shares of subsidiaries. When a company agrees to issue a property dividend they are issuing any asset of fair market value that is not a scrip, cash, or common stock. Property dividends allow the underlying company to satisfy their shareholders in the event that they do not have the funds to cover a regular dividend payment and do not want to dilute their shares.

Dividend Investing Strategies

Investing in dividend-yielding equities can be highly lucrative for the long-term investor because they allow for wealth building and the potential for an eventual snowball effect. In this article, I will be focusing primarily on DRIP investing as it is super passive and works for virtually any equity (individual stocks, , etc.). I will also touch on swing trading ex-dividend dates for quick profits.

For example, investing in a REIT (real estate investment trust) such as Orchid Island (ticker ORC) would net you just over %1 dividend payment per month. Yes, I said per month. With ORC trading at $5.89 as of writing this and having a monthly dividend of $0.07, an initial investment of $50,000 would give you 8,489 shares and a monthly dividend payment of $594.23.

By using a DRIP, you would reinvest the dividend payments each month and increase the number of shares you have, thus increasing monthly payments as well. After reinvesting your first month’s dividend and nothing else, your shares would increase to 8,590 and your second month’s dividend payment would increase to $601.30. Doing this over a 10-year period and never contributing again would bring you from an initial annual dividend yield of $7,130 to an annual yield of just over $27,000, or about $2,250 per month. Doing this over a 20-year period without any additional contributions and no changes to dividend would bring your annual dividend to a whopping $102,595 and change per year or $8,549 per month.

We can see by the example that DRIP investing can be extremely good for building wealth over time. DRIP dividends can be either automated through a service provided by a broker or could be something that you conduct yourself.

This type of trading play can be risky as many people do it and the underlying could see increased volatility during the buy and sell times. During the days leading up to ex-dividend equities can see an increase in share price as the demand for the underlying equity increase. Conversely, traders will see a drop in price just after the ex-dividend date as others following this play start to sell off and lock in share value and dividend payments.

An example of this can be seen in ticker ORC which is a REIT, is not very volatile, and pays a monthly dividend. Looking at the chart for the month of November of 2020, we can see a sharp increase in share price leading up to the ex-dividend date of 11/27/20 followed by an almost immediate selloff afterward. Over this period, shares rose more than 10% leading up to the ex-dividend date and fell to nearly the same price they started the month off at. See below.

While buy and sell volume can be influenced by dividend dates, it is not always going to play out the same. Catalysts can also be a driving force in dividend stocks as well and prices could move accordingly. Swing trading dividends can be a great active income generator but the value of the underlying equity and all factors should always be considered.

Jumping into the world of investing can be a daunting challenge and involve a ton of education and trial and error. The end goal for most investors should be passive income through dividends. However, with the right knowledge and goals, any investor is able to find and commit to a strategy that fits their needs. Dividend investing can be mainly for long-term investors but can also be utilized by active traders in the form of swing trading dividends. Whether you’re an active or passive trader, being equipped with the right knowledge and game plan is the key to success.

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