Dividends 101: A Beginner’s Guide to Income Investing

If you're looking for a way to grow your money without constantly watching the markets, dividend investing might be the strategy for you. It's one of the most popular approaches for building a steady stream of income, especially for those who prefer long-term investing.

In this article, let’s break down dividends in simple terms and help you understand how to get started (even if you’re a total beginner).

What Are Dividends?

Dividends are payments made by a company to its shareholders, usually every quarter. (Some companies might be paying out dividends half-yearly too) It’s a way for the company to share a portion of its profits with the people who own its stock.

Think of it like a reward for being a shareholder — as long as you hold the stock, you may receive cash (or additional shares) on a regular basis.

Not all companies pay dividends. Tech and growth companies often reinvest their profits to grow the business instead of distributing them. On the other hand, mature, stable companies like Coca-Cola, Johnson & Johnson, and Procter & Gamble often pay reliable dividends.

Dividend Yield vs. Dividend Payout

These are two terms you’ll often see when researching dividend stocks:

• Dividend Yield
  This shows how much you’ll earn in dividends each year compared to the stock’s current price.

  
  Example: If a $100 stock pays $4 a year in dividends, the yield is 4%.

• Dividend Payout Ratio
  This is the percentage of earnings a company pays out as dividends.
  

  Example: If a company earns $5 per share and pays $2 in dividends, the payout ratio is 40%.

A high yield can be tempting, but be careful — it could also mean the stock price has dropped due to trouble. And if the payout ratio is too high (e.g., 90%+), the dividend might not be sustainable.

Additionally, apart from just solely focusing on dividend yield or payout ratio, it is also always good to take a look at the trend of the stock — is the stock in an uptrend or downtrend? If the stock is in a downtrend, you could be receiving dividends but losing out on capital, which isn’t ideal…

Why Investors Love Dividend Stocks

Here’s why many investors (especially long-term ones) include dividend stocks in their portfolio:

• Steady Income
  Dividends provide regular cash flow. It is great for retirees or anyone looking for passive income.

• Lower Volatility
  Dividend-paying stocks tend to be less volatile than growth stocks.

• Compounding Effect
  Reinvesting your dividends can help your portfolio grow faster over time, thanks to compound interest.

• Confidence in the Business
  A company that consistently pays (and raises) dividends is often financially strong and confident about the future.

Dividend Aristocrats & Consistency

Some companies are known for not just paying dividends — but raising them every single year.

These are called Dividend Aristocrats — companies in the S&P 500 that have raised dividends for more than 10 years in a row and have a minimum three-month average daily trading volume of at least US$ 1 million.

Some examples include:

• Procter & Gamble (PG)

• Johnson & Johnson (JNJ)

• Coca-Cola (KO)

• McDonald’s (MCD)

Investors love these companies because they’ve shown strong discipline and financial strength over decades.

Things to Watch Out For

While dividend stocks can be a great addition to your portfolio, here are some things to keep in mind:

• Too-Good-To-Be-True Yields
  If a stock is offering 10%–15% yields, dig deeper. Sometimes, high yields come from a falling stock price, which could signal deeper issues.

• Dividend Cuts
  Dividends are not guaranteed. A company can reduce or stop its payouts during tough times (e.g., COVID-19 period).

• Sector Risk
  Many high-yield stocks are concentrated in certain sectors like utilities, real estate (REITs), or energy. Make sure you’re diversified!

• Currency & Tax Considerations
  If you're buying foreign dividend stocks (like in the US), be aware of withholding taxes.

📌 Important Note for Singaporean Investors

If you’re based in Singapore and investing in US dividend-paying stocks, take note:
The US imposes a 30% withholding tax on dividends for foreign investors.

That means if a stock pays you $100 in dividends, you’ll only receive $70 after tax.
This tax is deducted automatically, and you don’t need to do anything — but it does reduce your actual income, so factor that into your planning.

This is one reason why some Singaporean investors also look at local dividend stocks or ETFs for income — since they are not subject to foreign withholding tax.

Final Thoughts

Dividend investing is a simple, proven way to build passive income and grow your wealth steadily over time. Whether you're just starting out or looking to balance your portfolio, having a few reliable dividend stocks can make a big difference.

Start small. Look for strong companies with a consistent dividend history, sustainable payout ratios, and a healthy business model.

If you stay patient and reinvest your dividends, you might be surprised how much your portfolio grows in the years ahead.

Hope you have found the above useful 😃 

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- Joey, Bervyn & Zee

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