October 23, 2013   by

dividendsChamas today and getting more sophisticated when it comes to investment and one vehicle of investment that is bound to give you regular income is Dividends. These are payments that are made from a company to the shareholders of the company. Many companies engage in this practice regularly. It is common practice to hear during annual general meetings the declaration of dividends to share holders. The money to pay the dividends comes from part of the profit of the company. All of the profit for the company is not necessarily paid out in dividends; some of it is retained or invested back into the company. Traditionally, dividends are disbursed on a quarterly basis. However, some companies issue them on a yearly basis. Others offer them every single month. Therefore, you will have to clarify the frequency of the dividend with the particular company that you purchase from.

You may be wondering why a company would pay their shareholders a dividend. One reason is that the shareholders are considered part owners of the company. When a company realizes a nice profit, it is only natural to share the profit with the owners of the company. Some companies do this to make their shareholders happy. Getting a nice source of residual income increases shareholder loyalty. It will also entice others to buy stock when it becomes available. The fact that a stock pays a dividend can help increase the price of the stock, which also helps the shareholders.

Other companies issue a dividend as a show of strength. Issuing dividends is an optional practice. If times are tough, some companies will cut out their dividends all together. However, companies that are doing well issue their dividends to look financially strong.

So, how can your Chama tap into this lucrative investment vehicle? First of all, with the help of a reputable Stock broker, you can be able to identify listed companies on the Nairobi Stock Exchange that pay dividends. Next, is to buy shares so that you become shareholders and thus eligible to enjoy regular dividends from that company.

Here are more benefits you will enjoy through dividend investment. Security on your investment. When a company issues a regular dividend to your Chama, it can provide you with security. You do not have to worry about the up and down movements of the price of the stock as much. You can rely on your dividend payment to provide you with a nice return. Also, your Chama enjoys a passive income. One goal of many investors is to create a passive stream of income. With dividend stocks, you should be able to do this easily. If you buy a dividend stock, you can get a frequent payment without doing any actual work. Also, many Chamas take the dividends that they are issued and immediately use the money to reinvest in stock. When you do this, it helps you to compound your investment even faster. The size of your dividend payment depends on how many shares you own. For example is a company is paying Kshs.10/- dividend per share. If your Chama has 1,000 shares, you earn Kshs.10,000. Think if you have 10,000 shares. You get a cool Kshs.100,000/-. Therefore, when you buy more shares every time a dividend is issued, you will get an even bigger dividend payment next time.

Dividends are paid out of a company’s earnings. The amount that the company earns in a given year or quarter, therefore, is of central importance in determining how much to pay investors. The company must weigh its income against future needs to determine how much of its earnings to distribute. Retained earnings the cash not paid to investors are one of the sources of a company’s operating capital.

Another important consideration is how much the company has paid in the past. Major shifts in dividend policy can signal either positive or negative news to the market. For this reason, a company may maintain its dividend even when it projects higher cash needs so as not to send a weak message to investors and the market. As many investors judge a company by its dividend history, many companies are very careful in managing expectations through dividends. As a Chama, you should consider each of these factors when analyzing a stock. Blue chip companies tend to be very stable and you can be sure to earn regular dividends thus earn a secure income.


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