Most first-time investors have a poor understanding of what guaranteed dividends are and its relation to an investment. Dividends are payouts to eligible stockholders a portion of a company’s profit, depending on the number of shares of stocks.
Not all companies pay dividends. Most of the time, the board of directors decide whether paying a dividend would be beneficial for their company based on the present financial and economic factors. Most of the shareholders receive their dividends in cash distributions on a monthly, quarterly, or annual basis.
What most new investors do not know is that dividend payments are not mandatory unlike interest paid on bonds. The board of directors can choose to reduce the dividend amount or even terminate it at any time. For instance, most startups do not pay dividends because they want to use their profits to expand and grow the business first.
Why People Invest in Dividend Stocks?
Whilst there is no guarantee in dividends, many investors consider it as a good source of income. Retirees often invest in dividend stocks and set a schedule on when to receive their checks. On the other hand, younger investors who do not need the money yet often reinvest their dividends.
Dividend stocks have the best yields when interest rates are low, that’s why many prefer to invest their money in them.
What are Guaranteed Dividends?
Guaranteed dividends are dividends the company has to pay on its preferred stock. They are often cumulative so if a company skips a payment, they cannot make dividend payments on its common stocks until they have fully paid all their preferred stockholders. In most instances, preferred stockholders can force a company to liquidate when it fails to pay its guaranteed dividends.
These guaranteed dividends are linked to preferred shares, a type of company equity. However, this does the shareholders voting rights, which makes creditors and bondholders more superior over preferred stockholders.
Guaranteed dividends are advantageous over common dividends or common stocks since it has a fixed dividend rate, which accounts for stability. Shareholders know how much the company owes them in dividends. Additionally, these dividends have a higher rate and are more transparent. This is because balance sheets will show rates and terms.
Whilst a guaranteed dividend has many advantages, one of its disappointing quality is its sensitivity to interest rate changes. The present value of a guaranteed dividend often falls as interest rates increase.
Should You Invest in Guaranteed Dividends?
A number of investors choose to put their money in guaranteed dividends more than bonds because of its attractive dividend yield. Guaranteed dividends do not take part in the future growth of the issuing company.
If you are seriously thinking about investing in guaranteed dividends, you must take into consideration your overall investment risk. Do you prefer to receive a fixed payment on a regular basis or do you want your money to grow over time?
Once you decide to invest in a guaranteed dividend, consider purchasing a high-quality, diversified ETF during a market turmoil. Since most shares can be purchased at a highly discounted price to par value, this will generate a high dividend yield.