Deepen your understanding of dividend stocks: Strategies and steps for successful investing

Why Invest in Dividend Stocks

Holding dividend stocks is a worthwhile investment option when the stock market experiences minimal price fluctuations. These stocks provide investors with regular cash income from the company’s profits. At the same time, there is an opportunity for the value of the investment to increase as stock prices rise. Additionally, they grant shareholders the right to own a partial stake in the company they invest in.

What Do Dividend Stocks Mean?

Dividend stocks refer to shares of companies that follow a policy of distributing profits to shareholders in the form of cash. The payout amount depends on the company’s profits for the fiscal year and must be approved by the shareholders’ meeting.

For example, if XYZ stock announces a dividend of 2 baht per share and you hold 5,000 shares, provided you hold the shares until the record date, you will receive a total cash dividend of 10,000 baht (after tax).

It is important to understand that dividends come from the company’s profits, not from the initial capital. The company divides its profits into two parts: one retained to expand operations, and the remaining distributed back to shareholders.

Types of Dividend Payments

Payment Methods

1) Cash Payment
This is the most common method. Investors receive the money directly, with a 10% withholding tax deducted before it is transferred to their accounts.

2) Stock Dividend
The company issues new common shares and grants them to shareholders instead of cash. This method helps the company preserve cash flow but increases the total number of shares in the market, which can lead to a decrease in stock price.

Payment Timing

1) Annual Dividend
The company declares and pays dividends based on annual profits, usually announced in March and paid approximately one month later.

2) Interim Dividend
Some companies may pay additional dividends outside the regular annual payout, such as in August-September, upon approval by the board of directors, and reported at the next shareholders’ meeting.

Key Metrics Investors Need to Understand

Dividend Policy of each company (Dividend Policy)

Different companies have varying dividend policies. Some pay high rates, others are more conservative. This policy provides a broad framework, but the actual rate depends on shareholder approval.

Dividend Payout Ratio (Dividend Payout Ratio)

This figure shows what proportion of profits is paid out as dividends. Calculated as:

Dividend Payout Ratio (%) = (Dividends per share / Net profit per share) × 100

For example, if a company has a profit of 5 baht per share and pays a dividend of 2 baht, the payout ratio is 40%.

Dividend Yield (Dividend Yield)

This indicator shows how meaningful the dividend income is to your investment. Calculated as:

Dividend Yield (%) = (Dividends per share / Current stock price) × 100

For instance, if the stock price is 100 baht and pays a 5 baht dividend, the yield is 5%. If you buy at 80 baht, the yield increases to 6.25%.

How to Select Suitable Dividend Stocks

1. Choose companies with strong financial fundamentals

Dividends come from profits, so you should select companies capable of generating consistent income. This basic condition ensures that dividends can be paid continuously without diminishing the company’s or stock’s value.

2. Avoid excessively low dividend payout ratios

Investing in dividend stocks should yield at least the inflation rate. If inflation is around 2% per year, paying less than that is not worthwhile, as it effectively erodes your purchasing power.

3. Be cautious of abnormally high dividend payout ratios

Stocks announcing very high dividends might be a warning sign. It could be a one-time payout from accumulated profits or a payout after which profits are exhausted. Such situations are unsustainable long-term, and investors may see high dividends only for a few times before stock prices decline over the long run.

4. Check for consistency in dividend payments

Don’t just look at one year. Review how many years the company has paid dividends regularly. Consistent payments indicate financial stability.

5. Time your purchase appropriately

Your purchase cost affects your return rate. Investors buying at 50 baht will have a higher percentage return than those buying at 60 baht. It’s better to buy when prices drop rather than waiting for dividend announcements.

Steps to Buy Dividend Stocks

Step 1: Open a stock trading account with a securities company

Submit a copy of your ID card, a copy of your bank account page, and the account opening form. The securities company may also request proof of funds for trading.

Register for E-Dividend service simultaneously to ensure dividends are automatically transferred to your bank account when paid. This process takes about 1-5 business days for approval.

Step 2: Transfer funds into your account

Once your account is approved, transfer your investment funds to your stock account. This amount will serve as capital for trading and can be used immediately.

Step 3: Research and select dividend stocks

Before purchasing, study details about the companies you’re interested in. Track stock price movements using Watch List or technical analysis. When you find a good price, you can place an order.

Step 4: Monitor performance

Regularly read the company’s financial reports. When the company announces good profits, dividends are likely to follow. Wait for the shareholders’ meeting approval and watch for the ex-dividend date, which indicates the last day to hold shares to receive dividends.

Step 5: Receive dividends

On the dividend payment date, cash will be transferred to your registered E-Dividend bank account within about a month. Dividends are subject to 10% withholding tax, which can be deducted from your annual income tax.

Common Investor Questions

Q: How long do I need to hold stocks to receive dividends?
A: There is no time condition. The key is to hold until the XD date (Exclude Dividend), which is the last day the company counts shareholders for dividend entitlement. Buying on or after the XD date means you will not receive the dividend.

Q: How do I know if a stock pays dividends?
A: You can check dividend payout ratio (Dividend Payout Ratio) or (Dividend Yield) on the stock exchange website. You can also look at the high dividend index, which compiles the 30 companies with the highest dividend payments.

Q: When is the best time to buy dividend stocks?
A: In an efficient market, stock prices already reflect available information. If you buy after dividends are announced, the price may have already increased. Therefore, buying before the earnings announcement when prices drop is a better timing strategy.

Summary

Investing in dividend stocks is a suitable strategy for those seeking a steady cash flow. At the same time, there is potential for capital appreciation. The key is selecting companies with strong fundamentals, reasonable payout ratios, and timing your purchases well. Following these principles, you can invest confidently in dividend stocks and avoid common pitfalls that beginner investors often encounter.