Dividends are often known as a secret weapon in the armoury of any investor, however, they are often ignored and neglected by those who are not in the know. Our experts briefly discuss the role that dividends play in a portfolio, allowing you to make better investment choices.
What are dividends?
A dividend is a portion of a company’s profits that is paid to, or divided up, between its shareholders. Therefore, if an individual holds shares within a company, then they are likely to be paid dividends proportional to the amount of shares they hold. While companies may pay dividends at any stage of their growth and development, they are often likely to be paid when a company has passed its fastest growth stage (when the shares of the holders are no longer increasing in value), and thus dividends paid to the shareholders are encouraged to continue holding the shares and keeping the company attractive to investors.
The attractions of dividends
As stated, companies are often most likely to pay dividends when their share price has stabilised, and therefore it means the risks of investing in the companies is relatively low, making them ideal for low risk investors. Equally, the payment of the dividend itself, combined with the value of the shares themselves means that your investment is likely to be secure, offering you a steady return on investment.
Dividends are also taxed at a lower rate than ordinary income, so business owners may choose to invest in more shares in their business, as this results in a lower tax rate than would be paid on a salary
The drawbacks of dividends
While dividends are often provided by investments that are low risk, this does not mean no risk. As with all investments, there is the chance that the shares will lose value, or even fall to 0 in the case of company insolvency. Equally, a company can choose whether to pay dividends or not, so just because dividends have been paid in the past, it does not mean this is guaranteed in the future. Therefore, it is well worth investigating any company thoroughly before investing your money in their shares.
Dividends are also relatively complicated when incorporating them into your bookkeeping, especially for small businesses who have many other priorities to focus on. As such, it is well worth hiring a bookkeeper to help you manage your bookkeeping, dividends and dividend allowance. For more information on the help and advice Cornel Accountants can provide, please contact us at https://cornelaccountants.com/#getintouch