MANILA, Philippines – Do you feel stressed watching stock prices go up and down, unsure when to buy, sell, or hold stocks? As much as some research is needed, investing in stocks should not be stressful. Instead of working for your stocks, let your stocks work for you.
Owning stocks of a company means you become one of its owners, albeit with a limited say on how to run the business. There are two ways to earn from stocks: selling at a price higher than when you bought them, and from receiving dividends.
For illustration purposes, let’s ignore taxes. Suppose you bought 100 stocks of DMCI Holdings (stock code: DMC) on June 24 for P8.46 each, spending P846. If you sold all 100 stocks on October 26 for P10.40 each, you would have received P1,040, giving you a profit of P194.
If you held on to your stocks up to November 2, you would have been entitled to dividends of P0.72 per stock, receiving P72.00 November 16. Once you sell your stocks, though, you are no longer a part-owner of the company and will not be entitled to future dividends.
Although you can earn more by “buying low and selling high,” you don’t really know if and when the stock price will increase. In all likelihood, the price may fall below your buying price.
On the other hand, receiving dividends depends only on the number of stocks you own regardless of the stock price. This makes watching price movements unnecessary, and provides an easy and stress-free strategy to earn from stocks.
What are dividends?
Dividends are earnings that a company decides to distribute to its owners, investors who own their stocks. There are different types of dividends but we will focus on cash dividends: dividends given in the form of cash.
What concepts should I know about dividends?
To receive dividends, you must own stocks of the company by the ex-dividend date, holding on to them up to the record date when the company will take note who will receive dividends. You will receive the dividends on the payment date.
A stock’s dividend yield is the expected earnings after buying the stock at an indicated stock price. This value changes depending on the stock price and the expected dividends. To compute the dividend yield, simply divide the expected dividends by the stock price.
For example, Aboitiz Power (stock code: AP) reported in March that they would distribute dividends of P1.45 per stock, with March 15 ex-dividend date, March 18 record date, and March 30 payment date. This means that you should have bought AP stocks by March 15 and held them up to March 18 so you could receive dividends on March 30.
Let’s say the stock price of AP was P34.30 on March 4. At that price, the dividend yield was about 4.23%: 1.45 (the expected dividends) divided by 34.30 (the stock price). This means that if you bought AP stocks for P34.30 each, you could expect to gain 4.23% from the P1.45 dividends you would be receiving.
What does this strategy look like?
Investing in stocks should be a long-term decision. To avoid the stress of watching stock price movements, you simply buy a stock based on its dividend yield, then wait for the dividends to come in.
You don’t have to sell your stocks. In fact, you can just keep on buying more stocks by the ex-dividend date to receive more the dividends on the payment date.
Most companies distribute dividends once a year so it’s a good idea to buy various stocks that give dividends at different times of the year (some distribute twice, some four times a year). You may check the official website of the Philippine Stock Exchange for details on stocks and their dividends.
Which companies should I choose?
To be worry-free, it’s good practice to choose reputable companies that give dividends consistently. You want companies that you believe will be in business for a long time.
List down companies that you like or that promote advocacies you agree with, and check if they have consistently distributed dividends in the past years. Then compute the dividend yield of their stocks based on current stock prices and expected dividends.
Once you have your list, buy stocks of those with yields that appeal to you. For example, you can choose those with estimated dividend yield of 3% or higher.
Buying stocks of Real Estate Investment Trusts (REITs) is also a good idea if you want regular dividends since they are required to distribute dividends four times a year. REITs are companies that earn from owning real estates like condominiums, office buildings, shopping malls, and resorts.
As a final note, when you do your computations, you should always include taxes charged by your stock broker so you can have an idea of the actual amount you will pay or receive.
Investing in stocks should not be daunting. Buying stocks of reputable companies with consistently high dividend yield makes investing stress-free.
Once you buy a stock, forget about it. You’ll just be surprised one day by an email informing you that you received your dividends. This is one way you can earn money without doing anything. – Rappler.com
Patrick Vincent Lubenia is a certified Financial Risk Manager, a mathematician, and a Rappler+ member. His advocacies include developing financial literacy, promoting mathematical biology, and fighting disinformation in the Philippines.