Dividend-paying investments are powerful multipliers

Ali likes investing in major companies when they list on the UAE’s stock markets because it feels like his prosperity grows as the company grows. As it makes profits, a company pays dividends out of a percentage of its earnings to its shareholders as a reward for their contribution of capital. For investors, dividend payments are a measure of a company’s financial stability, robust cash flow, and confidence in its growth strategy.

While the company’s board of directors decides the amount, dividends are generally paid quarterly or annually in the form of cash or additional shares. Some exchange traded funds (ETFs) and mutual funds also pay dividends.

How to get an income and protect your investment

• Dividend-paying companies are seen as stable: Investors use dividend-paying companies to protect their portfolio from volatility because dividends demonstrate management’s confidence in the long-term profitability of the company.
• Dividends are a source of income: Investors use dividend income as a retirement plan because it assures regular cash without having to sell any assets.
• Capital appreciation adds to returns: Not only are dividend-paying stocks and funds a regular means of passive income, but when the share price increases, so does the total return. However, capital appreciation can only be monetized by selling the asset at the right time.

How to ensure benefits from a snowball effect

• Reinvest: A ‘dividend snowball’ strategy – where dividends from stocks or ETFs are automatically reinvested to buy more shares – helps a portfolio to grow over time, similar to compounding. For example: If you own 100 shares at AED100 each with a 5% dividend yield, you will receive AED 500 in year one. Reinvesting this money gets you 5 more shares. In year two, you will receive dividends on 105 shares, in effect increasing your income automatically.
• Dividend reinvestment plan: Also called DRIP for short, some companies offer plans to automatically invest dividend income into more shares, with incentives such as discounted prices and waiving off fees.
• Safety and growth: Dividend income can be a source of financial stability and regularity when you are no longer earning from a job or a business.

If you keep your investing thoughtful and consistent, you can rely on income from dividends when you need it.