Dividends can be more reliable than share prices as they’re driven by the companies performance itself and not by the whim of investors.
As part of a total return / reinvestment strategy, this income could be reinvested into income assets or back into the equity market depending on the relative valuations.
The emotional benefits of dividend re-investment. In fact, with this investment strategy you can actually welcome falling share prices.
Everything you need to know about dividends (but were afraid to ask)
We outline the basics about dividends from what they actually are to how they can provide a regular income
Adividend is quite simply a portion of a company’s earnings distributed to its investors.
In the UK most companies pay two ordinary dividends per year, one at the half-way stage (the interim or first-half dividend) and one at the end of the year (the final dividend). Some UK firms pay quarterly dividends.
Sometimes, companies will decide to pay a special dividend on a one-off basis if their earnings have been particularly strong or they have sold a business and have no use for the cash themselves.
Investment trusts and funds also pay dividends to investors and they can be half-yearly, quarterly or even in some cases every month.
HOW DO YOU RECEIVE AN ORDINARY DIVIDEND?
To receive a dividend, you need to have a holding in a company, fund or investment trust that pays a dividend to its shareholders.
There are four important dates to keep in mind:
Declaration date – The day the board of a company, fund or trust reveals its intention to pay a dividend, including the date and the amount per share.
Ex-dividend date – Investors who own the shares before this date qualify for the upcoming dividend, those who buy the shares after this date and before the payment date are not entitled to the dividend.
Record date – This is the date the company, fund or trust uses to determine who owns its shares and are therefore entitled to the dividend.
Payment date – The dividend is dispensed and appears in your account. This is usually around one month after the record date.
In the days leading up to the ex-dividend date, the price of your shares might go up as other investors decide to buy because they also want the dividend.
On the day the stock goes ex-dividend, the share price usually drops by the same amount in order to compensate for the fact that if you buy the shares now you have no right to the dividend (they are ‘ex-rights’, in market parlance).
No savings? I’d put £100 a month into this sleepy giant to generate passive income of £7,772 a year.
Story by James Beard
by The Motley Fool
I recently read that “passive income is the fuel that powers your dreams, giving you the freedom to pursue your passions and live your life on your own terms”. I have no idea who came up with this quote, but I hope they dream well and are in a position to spend their time doing something fulfilling.
Another investing concept that gets a good press is compounding. In the case of income stocks, this is the act of reinvesting dividends to buy more shares, generating an ever increasing level of return. This has been described as the eighth wonder of the world.
Just imagine how happy we could be by combining the two! Well, that’s what I try and do.
Now, I must be honest. I still have to work for a living and I’d love to have more freedom to do what I want. But I do have a steady stream of passive income that I’m reinvesting with a view to having a more comfortable retirement. Take two If I were to start my investing journey all over again, I’d put a relatively modest amount (say £100) into UK income stocks. If I then received dividend payouts of 5.9% a year — payable two-thirds/one-third in January and July, respectively — my hypothetical sum would grow to £67,248 after 25 years.
At this point, my shareholding would be generating income of £3,967 a year.
Readers may be wondering why I’ve chosen such specific numbers. Well, that’s because National Grid (LSE:NG.) presently offers a 5.9% yield and pays a dividend twice a year.
And it’s a share that has a long track record of increasing its payout.
My example assumes zero growth in its dividend. However, factoring in an increase of 3.6% a year — the company’s average annual increase over the past five years — would increase my investment pot to £131,731. This could give me an annual passive income of £7,772.
Remember, there could be some capital growth too.
Caution Of course, the stock price could fall. And dividends are never guaranteed. But this example highlights the potential long-term gains achievable from picking a steady and reliable income stock.
National Grid is able to pay a generous dividend because its earnings are reasonably secure. It operates in a regulated industry, which means as long as it keeps the lights on (literally), it will be able to achieve a pre-agreed level of return.
Because of this its share price performance tends to be unspectacular. This — along with the fact that it’s the UK’s 13th-largest listed company — is why I describe it as a sleepy giant. I think there’s always room for this type of stock in a well-balanced portfolio.
But there are a couple of things that could threaten its ability to maintain its healthy dividend.
Although it doesn’t face any competition it must meet its regulatory obligations. This requires huge capital expenditure.
It surprised shareholders in May by asking them for more money. Due to the company’s large borrowings, perhaps its directors felt they had no alternative other than to approach its owners for additional cash. I wonder if the terms offered by lenders were unfavourable.
However, despite these challenges, the next time I’m in a position to invest I’m going to seriously consider taking a stake.
The post No savings? I’d put £100 a month into this sleepy giant to generate passive income of £7,772 a year! appeared first on The Motley Fool UK.
I’ve sold the shares in M&G credit for a loss of £8.00 including the earned dividend but not yet received. The funds to be re-invested in Private Equity.
True diversification in a concentrated market Diversification has always been a foundational principle of smart investing. You’ve likely heard the adage “don’t put all your eggs in one basket.” Diversification is an investment technique that aims to increase returns and decrease overall risk by allocating across different investment types and industries.
Over the years, public markets have become more concentrated. In 1996, the number of U.S. publicly traded companies peaked at 8,134 before dropping to less than 4,300 in 2018. The decrease in publicly traded companies increases the challenge of achieving true diversification through traditional equity investing. Consider this: The top 10 companies in the S&P 500 now account for roughly one-third of the entire index. What’s more, most of these companies are in the tech sector.
Private equity, on the other hand, provides an opportunity to achieve deeper diversification. By investing in private markets, you can gain exposure to thousands of companies across a wide range of sectors and industries. Several of these sectors are underrepresented or entirely absent in public markets. For example, there are nearly 200,000 midsize companies in the United States, the vast majority of which are private. Midsize businesses account for one-third of private sector output and are predominantly private and not accessible through public markets. Investments into these companies can be accessed only through PE.
By including private equity in your portfolio, you gain access to different industries, market segments and business models that aren’t as susceptible to the concentration risks seen in market-weighted public indexes today, such as the S&P 500. Private equity investment is a way to broaden your exposure beyond the mega-cap, tech-heavy giants and reach into the broader economic landscape.
Alignment of interests for long-term success One of the most beneficial aspects of private equity is the alignment of interests between investors and the management teams of private companies. Liquidity, a readily tradeable market and accessible information are strong benefits for publicly traded companies.
However, in public markets, companies are often pressured to prioritize short-term earnings to satisfy shareholders and analysts. This pressure can lead to decisions that undermine long-term growth.
In contrast, private equity is not under the same rigor. Often, private equity aligns management goals with long-term performance metrics. Compensation packages in PE-backed companies are often tied to the successful growth and operational efficiency of the business over a period of five to seven years and are typically aligned with a successful exit.
Private equity’s structure encourages strategic thinking and operational stability that benefits both the companies and the investors. Compared to public companies, board members of private companies typically have a significant investment in the company, prioritize previous experience and meet more frequently and often prioritize long-term value over short-term accounting profits.
Proven superior performance How did your investment perform? What was the rate of return? Did it make money? Investment performance is an investor’s scorecard. Past performance is no indication of future performance. However, when evaluating investment options, historical performance is an important aspect of decision making.
Ares Wealth Management Solutions, a leading global alternative investment manager, conducted research on the performance of private equity compared to public markets over the past three decades. Overall, the research illustrates private equity’s long track record of delivering superior, more durable returns compared to public markets.
For instance, their report highlighted how if you had invested $100,000 in private equity (buyout market, the largest and most mature private equity market) in 1992, today you’d be looking at an approximate value of $6 million 30 years later. This is significantly superior to the approximate $1.1 million value that the same $100,000 would have generated in public markets (represented by the MSCI World Index). This kind of outperformance should not be overlooked.
In addition to superior performance, private equity has also proven to provide better downside protection, thus less pronounced declines during market downturns and faster recoveries afterward, according to the Ares Wealth Management Solutions research. During the 2008 global financial crisis, for example, private equity experienced smaller declines and quicker recoveries compared to the broader public markets. The same downside protection and quicker recovery was also evident during the COVID-19 pandemic.
Know the risks Private equity does come with risks; reduced liquidity and the need for a longer time horizon are certainly important factors in determining whether private equity is an appropriate investment. Investments are not listed on any securities exchange and may not be readily liquidated.
An additional risk that can adversely affect the performance of private companies is their reporting requirements. Private companies are generally not subject to SEC reporting requirements, are not required to maintain accounting records in accordance with generally accepted accounting principles and are not required to maintain effective internal controls over financial reporting. Due to the lack of reporting requirements, there is the risk that investors may invest based on incomplete or inaccurate information.
A powerful tool Due to the ever-changing economic landscape, private equity’s potential benefits in terms of diversification, alignment of investor interests and historically superior performance make it an investment category worth considering. Private equity can give you opportunities that you would otherwise not have access to through public markets — potentially helping you find the right balance between risk and reward
