🎙 Making money while you sleep sounds great, doesn’t it? And the good news is that it’s available to anyone when you invest in stocks that pay good dividends. It’s a great way to add extra income to your wallet and boost your financial goals. Income investing through dividends is also a great option for creating an income stream in retirement. But how do dividends work? 🤔
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Hello, friends! And welcome back to Girl on FIRE, the financial independence podcast for independent women.
My name is Priya, I’m a Chartered Accountant, an analyst and the creator of Paper Money Co.
I’m also a fierce financial feminist and the host of this podcast. I believe that a woman who is in control of her money, is in control of her life.
This week we’re talking about making money while you get your beauty sleep.
No need to get dressed and go to work. No need to be all professional when you really want to punch someone in the throat.
No need to label your lunch and stick it in the fridge only to find that Brenda from Human Resources stole it.
Doesn’t that sound amazing? And doesn’t that sound so much more fun than “stop drinking your morning latte” or “don’t go shopping” or my personal favourite “leave your wallet at home so you’re not tempted to shop”?
I think it sounds way more exciting. Girl on FIRE is about getting more money, which means more power, into the hands of more women.
And honestly, if you give up you’re latte, you’re going to be tired and cranky. So, instead, we’re talking about increasing your income through earning dividends from your investments.
We’re going to take a deep dive into dividends and how they work. We’ll also talk about how they fall into your investing strategy.
But before we get started, I promised you last week that I was going to let you in on a little secret.
I’m going to be hosting a masterclass in July where I share my 3 Insider Secrets to Financial Success.
I’m going to let you in on how you can budget your way to 6-figures like a pro, just like I did, without giving up your latte and all the things you love.
It’s totally free, you just need to register so I can send you the link to join. And also so that I know you’re coming.
Trust me, I would put out some coffee and croissants for you if I could.
I’d love to see you there, so head to papermoneyco.com/masterclass to get registered.
And to be honest, I could also use some moral support from my Girls on FIRE. This is the first masterclass I’ve hosted and I’m a little terrified.
But in this masterclass I’m going to walk you through the 3 biggest secrets that have shaped the way I budget.
You know that I’m all about getting the basics right first, so that’s what I’m going to cover in this masterclass.
These are things that I figured out through years of trial, error and tears. And they’re things that have formed the basis of how I budget and the money management that I teach.
So, I would love it if you would come along, even if it’s just for moral support because Priya has no idea what she’s doing. The link to register once again is papermoneyco.com/masterclass.
As I’ve said in many episodes a this point, the sooner you can get your foundation set and get those good money management practices in place, the sooner you can start investing and building your wealth.
And this masterclass will help you build a super strong foundation, so you don’t want to miss out.
As always, Girl on FIRE is about learning, so whip out your favourite notebook or journal and get ready to take some notes.
If you’re not into writing things out by hand, you can always find the transcript on my website — papermoneyco.com/gof25.
Okay, let’s dive in and talk about making some money!
How to make money from dividends
We talked about dividends way back in episode 15. It’s one of the ways an investor makes money from investing in the stock market.
If you need a little refresher, don’t worry, I’ve got you covered. A dividend is a payment that a company makes to it’s investors, it’s shareholders.
It’s a distribution of the company’s profits back to the owners of that company.
Most dividends are paid on a quarterly basis, and they’re expressed as a rate per share. So, for example, a company might declare a dividend of $1.50 per share.
Which is a really nice dividend. So, if you own 100 shares in that company, your dividend will be $150.
Okay, so next we’re going to go through some dates and timings of dividends.
Now, why do you need to know that? You need to know that because the declaration of a dividend is price sensitive information.
That means it can impact the price or value of the company’s share in the market.
Declaration and payment date
Let’s start with the declaration date and the payment date.
When a company is going to pay a dividend, the decision needs to be approved and announced by the board of directors.
And the day that the board of directors declares its’ intention to pay a dividend is called the declaration date.
The day that the dividend is actually paid out to investors is the payment date.
Ex-dividend and cum-dividend
So, after the board of directors have declared a dividend, an ex-dividend date is set by the stock exchange.
Ex-dividend means that the share is trading without it’s dividend. And what that means is if you buy any new shares on or after the ex-dividend date, you will not be entitled to receive the dividend that was just announced.
So, you can buy the shares, but you won’t get the dividend this quarter, you’ll have to wait until next quarter.
Once a share is trading ex-dividend, the share price usually drops a little bit, because investors aren’t getting instant dividends, they have to wait a little bit.
The day after the ex-dividend date is the record date. Companies have registers showing who their shareholders are and how many shares they own. This is usually managed by share registry companies like ComputerShare or Link.
If an investor isn’t on the company’s registry by the record date, then they won’t be receiving the dividend.
Now, the time between the declaration date and the ex-dividend date is special. During that time, the shares are trading cum-dividend.
And that means that if you purchase new shares during that time, you’re buying the share along with the right to receive the dividend that was just declared.
So, a company’s share price usually increases a little bit during that period, because you’re buying the share as well as the right to receive a dividend in the next few weeks.
Timeline of dividend declaration
Okay, so let’s recap that timeline. I’ve created a little graphic timeline to help you follow along with this. It’ll be linked in the show notes and in the transcript.
First, a company’s board of directors’ will declare its’ intention to pay a dividends to shareholders.
That happens on the dividend declaration date. They also set a payment date of when the actual dividend payment will be made.
After the dividend has been declared, shares are trading cum-dividend, with their dividend, for a little while.
During this time, the share price is generally a little higher, because if you buy shares trading cum-dividend, you’re also going to receive that dividend.
Shares continue to trade cum-dividend until the ex-dividend date which is set by the stock exchange. On that date, the shares are trading without their dividend.
If you purchase new shares once they become ex-dividend, you won’t be entitled to receive the dividend that was just declared.
Once a share has become ex-dividend, the share price will drop a little bit because investors won’t be making that quick income.
The day after the ex-dividend date is the record date. Investors who are on the company’s records by the record date will receive the dividend.
If you’re not on the list, you won’t be getting the dividend that was just declared.
Then, the payment date comes around when the dividend is actually issued to shareholders. And the whole cycle begins again for the following quarter.
Dividend dates on the stock market
Now, how do you know when a share is trading ex-dividend or cum-dividend or when a dividend has been declared?
All of this information is available to the market. And your online broker should have a way for you to see this news when you log in to your brokerage account.
For example, if you’re in your brokerage account and you look up a specific ticker code, it’ll show you recent information about that stock, it’s price and it’s movement.
And it should also have a little flag that tells you whether it’s trading cum-dividend or ex-dividend. Or, it’ll say nothing, if no dividend has been declared.
You can also look up this information on the ASX or stock exchange website. I’m going to leave an example of this information for Woolworths in the transcript and in the show notes for you to take a look.
I got this by searching the Woolies’ ticker code (which is WOW) on the ASX website. You’ll see the ex-dividend date, the record date and the payment date.
Now, at the moment, the dividend for the June quarter hasn’t been declared, so the most recent information is from the March quarter.
Franking credits (dividend imputation)
Now, one other quick thing I want to draw your attention to is franking credits. I’ve mentioned it briefly before, but franking is Australia’s dividend imputation system.
It’s pretty complex and I’ll dedicate a whole episode to it in the future, but it’s basically a way of ensuring that the money you receive as a shareholder isn’t taxed twice.
So, companies pay dividends from their after tax profits. Which means they’ve already paid taxes on the money you earn as a dividend.
And the franking credits essentially give you a tax credit so that you as the investor only have to pay the difference between the company tax rate and your personal tax rate.
That’s franking in a very small nutshell, but I’ll dig into it in a future episode. Now, if you look at that screenshot with all the dividend dates, you’ll see it also says 100% franking. This might sometimes also be expressed as fully franked.
What that means, is that Woolies has paid tax on the entire dividend. And you, as the investor, will receive a credit for 100% of the tax paid on that dividend.
So, as a really quick example, let’s say you have a $10 dividend. Your personal tax rate is 40%, so you would have to pay $4 in income tax on that dividend.
But Woolies has already paid $3 of tax on the dividend, and they’ve given you a fully franked dividend. So, in that case, you only need to pay the extra $1 of income tax, instead of the full $4.
So, like I said, it’s a lot more complex than that, but that’s the jist of how it works.
And a great benefit we get access to when we invest in companies listed on the ASX.
Okay, so now that we’ve got all that technical stuff out of the way, I want to talk about why you might choose to invest for dividends, and then how you’d go about executing that investing strategy.
FIRE & investment calculator spreadsheet
But before we move on, I want to ask my Girls on FIRE for a favour. If you’ve listened this far into the episode then you’re probably enjoying it, right?
So, here’s what I’d like you to do next. Pause this episode for a few seconds and head on over to papermoneyco.com/podcastreview.
I want you to leave a rating and review for Girl on FIRE because it helps me provide better content based on what you’re enjoying the most.
It helps other women out in the internet wilderness come and find us as well.
And it’s also a great way to support this show for free, and for that I’d love to send you a little something to say thank you.
If you do that, I’ll send you a copy of my FIRE and investment calculator. Which, if I do say so myself, is pretty damn amazing.
It’s how I plan for my early retirement and my wealth. It shows me how my wealth is going to grow, when I can retire and how long my money will last.
And it also has a separate tab that takes Australia’s superannuation into account as well.
And you can use it to analyse companies and different investment options when you’re picking stocks too.
I’ve never actually seen anything like it before, so it’s pretty special. And I’m currently not offering that spreadsheet anywhere else except on my Patreon.
Not in my shop, not to my email list — it’s a ghost. So, this is kind of a money-can’t-buy type deal.
The only way to get your hot little hands on that spreadsheet is by submitting a rating and a review, taking a screenshot and tagging me in it.
That URL again is papermoneyco.com/podcastreview. I’ve made it nice and easy for you.
So, go hit pause and do that right now. It’s okay, I’ll wait.
Okay, that concludes my little ad-break, so let’s get back to it.
Dividends and your investing strategy
Let’s say you own some stock in a company and they’ve just declared a dividend. So, lucky you, you’re about to make some easy money!
When you earn a dividend, you’re earning passive income and there are a number of things you can do with it. For example:
- You can take the cash to use it as income for your expense and your goals; or
- You can take the cash to invest it in other assets, so you might take a dividend from Woolies and go invest it in Apple instead; or
- You can opt in to a dividend reinvestment plan where you automatically reinvest your dividend in the company you earned it from.
The first thing you’ll need to do is make sure that your details are correct, especially your bank account details.
Now, I mentioned before that company’s have registry services with third parties like ComputerShare and Link.
When you first purchase some shares, that company should tell you where their share registry is.
If they haven’t, try looking it up on the investors section of their website or you could even just try calling them and asking.
You can then create your account with those registry companies if you haven’t got one already.
Those accounts are made under your investor ID, so if you invest in 10 companies and they all use ComputerShare, all your holdings will appear there under the one account.
You don’t need to make one account per company, it’s just one account for you as the shareholder.
Now, when you log in, that’s where you’ll see a payment notice for those dividends. And you’ll have the ability to update your bank account to receive it as cash.
If you’re taking your dividend as cash, then you just update your bank details, sit back and wait for the money to roll in.
Dividend reinvestment plans
But you can also opt in to a dividend reinvestment plan as well. We talked about dividend reinvestment plans or DRIPS in episode 15.
It’s a way of telling the company that instead of receiving the dividend in cash, you want to use it to purchase additional shares in the company.
You’re reinvesting your dividend back into the company that issues it to you.
DRIPS are a great option to help grow your portfolio and build your wealth. They’re easy to opt in to, the reinvestment is automatic, you just need to say yes and then you don’t need to do anything else.
New shares issued to you under a DRIP are often at a lower price than market value for the company’s shares, which is nice.
That means you get more shares through the DRIP than if you were to take the dividend as cash and buy more shares in the same company.
You also usually don’t need to pay any brokerage or commission. And you might also be able to purchase fractional shares instead of whole shares.
Buying 50% of a share here and there might not seem like much but it does add up over time.
If your dividend isn’t enough to purchase a whole share, then the registry company might hold on to it until the next dividend payment when you do have enough to buy a whole share.
A great thing about DRIPS is that you’re increasing the number of income producing assets you own.
So, if you start of with 10 shares, and after the DRIP you have 12 shares, the next time a dividend is declared, you’re earning that dividend on 12 shares.
You’re earning income on 2 more shares that you didn’t have to pay brokerage for and you didn’t have to invest more of your capital to get them.
You just reinvested the income you earned from your existing assets and holdings.
Determine your investing strategy
Okay, so let’s talk about how to invest for dividends. As always, this is going to depend on your investing strategy and your investing goals.
We talked about how to determine your investing strategy in episode 14. And that’s a really important first step, because it can shape how, and even if, you invest for dividends.
For example, I’ve mentioned before that I’m currently focused on growth, not income.
So, that means I’m investing in assets that offer me high capital gains as opposed to high dividends.
I’m still earning dividends on my investments, but it’s not my primary goal. So, all of that is being reinvested through a DRIP, when that’s available.
Or, if no DRIP is available, I’m taking the cash and adding it right back to my brokerage account.
So, right now, at this point in my life, I’m investing to grow my wealth and build my portfolio. I’m not interested in creating passive income to cover my expenses.
But that’s going to change. When I get closer to retirement, I’m going to start focusing more on investments that will provide me with a regular stream of income.
Because that’s one of the great things about dividends — as long as I’m investing in the right places, I can still earn dividends when the market goes down. And we’ll get into that a little bit in just a second.
So, when I’m retired, I don’t want to rely solely on capital gains, because the market it volatile in the short term.
Yes, I will be investing much more conservatively at that time, but my money won’t be in a piggy bank on my shelf.
It won’t be sitting in the bank where it’s not keeping up with inflation. The majority of my wealth will still be invested.
You can see from my investing strategy that I’m not going to say no to dividends, but it’s not my priority right now.
So, you need to understand your own investing strategy first before you start building a portfolio for earning dividends.
How to invest for dividends
Okay, so when you’re investing and building your portfolio for dividends, there are couple of key things you need to keep in mind.
First, and I mentioned this in episode 15 when we talked about stock market investing — dividends are not guaranteed. Companies are not obliged to issue dividends.
Invest in blue chip stocks
Companies that have a strong history of issuing dividends will likely try to continue to do so, even during a market crash.
Because it looks bad for them when they suddenly turn off the tap. Investors start to worry that the company isn’t doing well. They get nervous and pull out their investment, selling their shares.
And when they do that, two things happen. One, the supply of the company’s shares on the market increases.
And two, the demand for those shares decreases because the market doesn’t consider that such a great investment anymore.
If it was a great investment, why are shareholders selling off their shares willy nilly? And why have they suddenly stopped paying a dividend?
If everyone’s trying to get out, it must be a bad investment. That’s what market sentiment turns to.
And when those two things happen, the share price of that company goes down.
Even if you didn’t sell your shares, you’re potentially going to be making a capital loss. Your investment is going to lose value.
So, companies who have a strong track record of issuing dividends will only stop when everything really hits the fan.
And what that means for you as the investor, is that you want to look for companies that have a strong history of issuing dividends. As well as the ability to continue those dividends in the future.
Even through market corrections and market crashes. The amount of the dividend may change, but it’s still a dividend.
Now, companies that issue dividends like that are known as blue chip companies. And I believe that name comes from poker, because the blue chips are the most valuable.
I could be wrong, I have no idea how to play poker but I’m pretty sure I’d have a really bad poker face.
But blue chip stocks are well known and well established companies that have a history of paying out consistent dividends regardless of economic conditions.
They also don’t tend to fall as hard during market crashes. Because they’re so well established, they’re considered safer investments.
So, when investing for dividends, you want to look for blue chip companies, as opposed to something like a start up or an emerging market which might be making incredible capital gains as their share price skyrockets, but aren’t issuing dividends.
Dividends depend on cashflow
Another super important thing to note is this: a dividend is how a company distributes it’s profits to it’s shareholders, those who own the company.
However, dividends depend on cashflow. When you earn a dividend, you’re getting cold hard cash. So, companies need that cash available to be able to pay it to you as a dividend.
Not only that, but its’ important to note that blue chip companies with healthy cash flow aren’t made overnight.
One good year does not a blue chip company make. Just because a company has great profits and strong cash flow this year, it doesn’t mean that they can maintain that in the future.
And we just spoke about how damaging it could be for a company to cut their dividends. They don’t want to do that. So, companies with good governance are going to wait.
Sure, they had a good year this year, but they’re going to wait until they know the business is capable of generating the level of cash they need to be able to pay that dividend indefinitely.
So, as a savvy investor, when you’re looking to invest for dividends, you need to look for blue chip companies who have good cashflow now, and have will have good cashflow in the future.
That means looking at things like what kind of assets they have. What is the company investing in? How are they going to grow the business, increase income and generate more cash?
And where is that cash going? What are their expenses like? What are their debts like? Do they have massive loans due in the next couple of years that they need to pay back?
You could have a company with $1b in profit. But if they’re spending all that money on paying back debt, or reinvesting it into the business, they don’t have the cashflow to give you a dividend.
And similarly, you could have a company that’s growing like crazy in a new industry. The market sees them as a great opportunity, so investor sentiment is driving the share price up.
They’re still a new company, though, so they’re not making any profit yet. They’re growing, but they’re not profitable. They’re taking on debt and issuing more bonds and shares to raise more money to fund their expansion.
They could be a great option for capital gains. But they can’t pay you a dividend if they don’t physically have the cash for it.
So, always remember to look at cashflow. Analysing companies for stock picking isn’t something you’ll learn overnight.
But it’s also not just about looking at the profit and loss or the balance sheet. You always have to look at the cashflow statement as well.
Ways to evaluate dividends
Now, to end this episode, I want to talk about a couple of ways to evaluate dividends.
This is just another way you can look for companies to invest in that align with your investing strategy.
First up, is the dividend payout ratio. This is the percentage of net income that is paid out in the form of a dividend.
So, to calculate this, you would take the total amount of the dividends a company pays out and divide it by the net income they earned for that same period.
This shows you how much of their net income they’re actually paying out in dividends.
Well established, mature companies that are running really well often have a higher payout ratio. That means they’re paying out a higher percentage of their profit as dividends to investors.
Now, the inverse of that is also helpful. The amount they’re not paying out is their retention ratio. And that can help you determine what the company’s plans are for growth and reinvestment.
Companies usually don’t pay out dividends if they think they can take that cash and reinvest it back into themselves and give you a higher return. So, looking at the retention ratio can help you there.
One thing you always need to remember about investing in stocks is this. For listed companies, that’s companies listed on any stock exchange anywhere in the world, their priority is always the shareholder.
It’s not the customers, it’s not the employees or the communities they operate in. It’s always, always the shareholders. Because the shareholders own the company and they’ll want a decent return for their investments.
Another way to evaluate dividends is by looking at the dividend yield. This is the dividend amount divided by the current market price of the share.
It’s kind of like looking at the rate of return for that stock without the capital gains. How much dividend does a share yield compared to it’s market price?
If a stock is really expensive and giving you peanuts for dividends, it might not be a good place to invest your money.
You’re never going to invest in an asset that doesn’t generate enough income to pay for itself and then create a profit.
So, the dividend yield will help you determine whether you’re earning enough income from the assets your capital is deployed in.
Now I’ve been talking a lot about companies issuing dividends, but investments in specific companies aren’t the only way to earn them.
If you own index fund ETF’s, (like we talked about in episode 17), they’re made up of hundreds of companies, any one of which might be paying out dividends.
What an ETF will do is collect up all the dividends it receives from all it’s underlying assets.
And then it pays a portion of that out to you as a dividend based on the percentage of the total number of units you own in that ETF.
This method can be a huge advantage. Because, one, you’re reducing your risk by diversifying your investment. You don’t have all your capital in just a small handful of companies.
And, two, you’re also diversifying your dividend earnings. So, if one company stops paying dividends or starts paying much lower dividends, it won’t impact you as much because you’re still earning dividends from other places.
Next weeks’ episode
And that’s all I have for you Girls on FIRE today!
My challenge for you this week is to head to papermoneyco.com/masterclass and register for my free masterclass where I teach you my insider secrets to financial success.
I get asked how I managed to pay off debt and grow my net worth to over 6-figures on a modest salary, and this is how. I’m sharing the secrets!
I really hope to see you there, it’s totally free.
And the sooner you can get your foundation set and get those good money management practices in place, the sooner you can start investing and building your wealth.
On next weeks’ episode we’re going to talk about day trading and why it’s one of the most dangerous ways to invest your hard earned money.
It’s going to be a super interesting episode so you’re definitely not going to want to miss it.