Image copyright Getty Images Image caption Olive says this morning’s market drop is likely to be the last
What is dividend investing? How does it work? How should investors approach it?
This week’s agony aunt answers all those questions.
Welcome to the world of dividend investing – investing in a fund or shares that pays out a dividend each year.
With big global companies not increasing their dividends, millions of investors have been looking elsewhere.
So what should they do? How should they approach dividend investing? The charity Investors Wise has an online course called “Choosing Dividend Stocks”.
Not all dividend stocks are the same
Image copyright Getty Images Image caption Many of the biggest dividend-paying companies are highly-rated blue chips
Dividend stocks are effectively shares that pay regular cash dividends.
Many of the biggest dividend-paying companies are highly-rated blue chips.
The companies doing the best dividend-paying deals are listed on some of the major stock markets.
Many of them are big international corporations with diversified revenue streams.
It is the companies with this income that pay out their dividends.
The dividend is taken out of profits after these companies have made a profit.
So why is there this shift in investors’ thinking over dividend investing?
You’re either selling, or you’re buying
Investors have to look carefully at whether a dividend is sustainable.
The companies that pay out the best dividends pay them largely because they think they will make more money than they would if they didn’t increase their dividend.
Dividend-paying companies are also said to be safer, because they don’t rely as much on revenue from a particular type of product or service.
That means they’re less exposed to down-turns in those products and services.
It can be very difficult to predict the future
Image copyright Getty Images Image caption As the share price of a company rises, the yield on its dividend falls. But the more dividend you get, the more you are guaranteed to receive
The more a company pays out in dividends, the higher its share price rises.
This helps it become more attractive to investment groups like hedge funds and private equity funds that can invest through multiple share classes and raise money by offering higher yields than usual.
But as the share price of a company rises, the yield on its dividend falls.
That means that many investors are selling shares as they see their yield fall.
Meanwhile, people who are buying stocks often do so because they know that their income from investments will go up.
It can be very difficult to predict the future
This means that it can be very difficult to predict the future.
Although some of the biggest dividend stocks will be extremely defensive as long as the economy is growing, some sectors may suffer later if there is a recession.
Predicting the size of the next economic crisis is always hard to predict.
Stock markets are volatile
It was obvious on Friday that the market was looking over the edge.
Markets have gone through several spells of volatility over the past year and are now trading close to or at all-time record highs.
For some, this level of volatility has been a cause for concern.
Many analysts, for example, have called for the US market to tumble to new lows in 2019 as a result of a rise in global interest rates.
It is possible for dividend stocks to become more volatile than the market
But it is possible for dividend stocks to become more volatile than the market.
Dividend stocks may fall as much or even more than the market, though they may not fall as far.
It can take time for some of these companies to get back on their feet.
And it may not be enough for investors to rely only on dividends.
In the end they must be prepared to invest for the long term and not just on dividends.
Most of the world’s biggest blue chips are trading on low dividend yields
You can find out more about dividend investing here .