Stock dividends: How to choose the right selection and timing for investment

Dividend Stock Signals: Value and Risk

Many investors look for dividend stocks when the market is relatively stable. This is because the idea is that holding stocks not only offers long-term growth potential but also provides steady income through dividend payments. However, before deciding to buy dividend stocks, investors need to understand where dividends come from and how companies can sustain their payments.

Dividend stocks are not new; they are a mechanism where companies distribute a portion of their annual profits to shareholders based on a predetermined dividend policy. Dividend payments depend on the company’s actual performance and approval from the shareholders’ meeting. This means that if a company is not profitable, it cannot pay dividends regardless of its history of dividend payments.

Dividend Payment Methods: Cash vs. Stock

Companies have various ways to pay dividends, not limited to cash payments at the end of fiscal periods.

Cash dividends are the most common, where investors receive real money directly into their accounts, with a 10% tax deducted automatically. This method provides investors with regular cash flow, similar to earning interest from a deposit.

Stock dividends involve issuing new shares to shareholders. This helps the company retain cash but increases the total number of shares in circulation, which can lead to a decrease in share price.

Additionally, there are annual dividends, paid at the end of the fiscal year upon approval at the shareholders’ meeting, and interim dividends, which some companies pay mid-year.

Return Ratios: Numbers That Reflect Reality

When discussing dividend stocks, investors need to understand key terms used in analysis.

Dividend policy refers to the company’s general approach, such as a policy of paying no less than 25% of net profit or paying 100% of profits from subsidiaries.

Dividend payout ratio is calculated as (dividends per share ÷ net profit per share) × 100. For example, if a company pays 2 baht per share in dividends and net profit per share is 2.64 baht, the payout ratio is 75%.

Dividend yield is calculated as (dividends per share ÷ current share price) × 100. If an investor buys shares at 50 baht and receives 4.72 baht in dividends, the yield is 9.44%. If bought at 72.75 baht, the yield drops to 6.5%.

Common Mistakes to Avoid When Chasing Dividend Stocks

1: Don’t fixate on an excessively high dividend yield. Stocks with very high yields often hide risks; the company might be leaking accumulated profits or have recently undertaken large projects that could reduce future profits. Such stocks may offer high dividends only once or twice, after which the share price declines steadily.

2: Check the company’s profitability. Dividends originate from profits, not from capital. Choosing financially stable companies capable of sustained profits over the long term is the most important factor.

3: Look at the dividend payment history, not just one year. Good dividend-paying companies should demonstrate a consistent and stable payout record over many years. Volatile increases or decreases may indicate financial instability.

4: Don’t forget inflation. The dividend yield should be higher than the average inflation rate. For example, if inflation is 2% per year, a dividend yield below 2% means the investor is losing purchasing power.

Steps to Buy Dividend Stocks

1. Open a brokerage account. Similar to buying regular stocks, you need an ID card, a bank account copy, and account opening documents. Some brokers may require proof of income. Processing takes 1-5 business days.

2. Transfer investment funds into the account. After approval, investors can transfer money immediately for trading.

3. Search and analyze dividend stocks. Conduct prior research, possibly using technical tools to track price movements or fundamental analysis to determine suitable entry points.

4. Monitor company performance. Stay informed about news, annual profits, and announcements at shareholder meetings. Check the likelihood of dividend payments and approximate amounts.

5. Hold until the ex-dividend date (XD). To qualify for dividends, you must own the stock before the XD date. XD indicates that buying from that date onward excludes the right to receive dividends.

6. Receive dividends into your bank account. Dividends are transferred to the registered account, with 10% tax deducted. They can be used for tax deductions at year-end.

Important Timing for Buying

The same stock can yield different returns depending on the purchase timing. Investor A buys at 5 baht and receives 1 baht in dividends, resulting in a 20% return. Investor B buys at 6 baht with the same dividend, yielding only 16.6%.

The main issue is buying dividend stocks after positive news announcements. Stock prices often rise already, so to achieve good returns, buying should occur when prices pull back and before earnings reports are released. During this period, investors have a chance to buy at reasonable prices.

Frequently Asked Questions

How many days before the XD date should I buy? You can buy any day before the XD date; however, purchasing on or after the XD date means you will not receive the dividend.

What should I watch for in high-dividend-yield stocks? Excessively high yields may indicate hidden problems, such as the company using accumulated profits or operating in a declining industry.

When is the right time to sell dividend stocks? If the company shows signs of profit stabilization or reduces its dividend payout ratio, it may be time to consider selling or reallocating your assets.

Summary

Investing in dividend stocks is another option for those seeking steady income along with long-term growth potential. The risk lies in choosing inappropriate stocks—those offering temporarily high dividends but declining in value over time.

The key is thorough research: assess the company’s profitability, review long-term dividend history, and buy when prices are not too high. With good analysis, investors can build a dividend stock portfolio that provides adequate and stable returns.