Dividend stocks are shares of companies that pay out part of their profit to shareholders. Many investors look at them because they can provide a recurring income without selling the shares. This article explains how dividends work, how to calculate dividend yield, what tax is withheld and what to look at when choosing stocks. Daytraders.nl provides explanation, not personal investment advice.
What are dividend stocks?
A company with a profit can use it in two ways: it keeps the profit in the business to grow, or it pays part of it to shareholders. That payment is called a dividend. It is paid in cash, sometimes in extra shares. Some companies pay yearly, others quarterly.
A company is never obliged to pay a dividend. The board and shareholders decide on it again each time.
Advantages
- Recurring income: you receive dividends as long as the company pays them, even if you sell nothing.
- Price gains: besides the dividend, the share price can rise. This is not certain; the price can also fall.
- Reinvesting: if you use the dividend to buy extra shares, your holding keeps growing. This effect is called compound interest.
How do you calculate dividend yield?
Dividend yield shows how much dividend you receive per year relative to the share price.
Dividend yield = (annual dividend per share / share price) x 100
Example with round numbers (for illustration only): a share costs €50 and pays €2 in dividends per year.
(2 / 50) x 100 = 4%
If you own 100 of these shares, you receive €200 in dividends per year, before tax is withheld. The yield moves with the price: if the price falls to €40 and the dividend stays €2, the yield is 5%. A high yield can therefore look attractive, but sometimes it exists because the price fell as investors doubt the dividend.
Dividend tax in the Netherlands
Dutch companies withhold 15% dividend tax when they pay a dividend. This happens automatically, before the money reaches your account. For Dutch private investors this tax can, under conditions, be offset in the income tax return. Your shares also fall under box 3. Foreign shares have different withholding rates and treaties. The rules can change and depend on your situation. Read the basics of tax for investors, the information from the Dutch Tax Administration, or ask a tax adviser.
Dutch companies that pay dividends
Below are some well-known Dutch listed companies as examples. This is not a list of recommendations. Each company’s dividend and price can change strongly. Always look at the current figures in the company’s own annual reports.
- Shell: an energy company (oil and gas) known for its dividend payments. The dividend depends heavily on energy prices and business results.
- Unilever: a global consumer products company, such as food and personal care.
- Ahold Delhaize: a supermarket company. Demand for groceries is fairly constant, which can stabilise income.
- ASML: an example of a company with a lower dividend yield. With ASML, investors mainly look at the company’s growth. The dividend is secondary.
The difference between Shell and ASML shows that a high dividend yield and growth do not always go together. Which mix suits you depends on your goal and how long you want to invest.
How do you choose dividend stocks?
When comparing dividend stocks, look at these points:
- Dividend history: has the company paid a dividend for several years?
- Payout ratio: this is the percentage of profit paid out as dividend. A very high ratio, for example above 80%, leaves little room if profit disappoints.
- Dividend growth: does the company raise its dividend regularly? That can point to healthy management.
- Financial health: look at the company’s profit and debt in the annual report.
- Sector: some sectors, such as energy, are sensitive to world market prices. Others, such as consumer products, usually fluctuate less.
Getting started in practice
- Set a goal: do you want income, growth or a combination? That decides which stocks fit.
- Do research: look at dividend yield, payout ratio and annual reports.
- Compare providers: choose an authorised provider supervised by the AFM and compare the cost per transaction. Costs reduce your net return.
- Diversify: spread your money over several companies, sectors and regions. Read more about diversification.
- Reinvest or take the income: you can use the dividend as income or buy new shares with it.
Risks and points of attention
- Price risk: the value of a share can fall, even if the company keeps paying dividends. You may get back less than you put in.
- Dividend cut: companies can reduce or cancel their dividend, for example in a bad year.
- Sector risk: a portfolio of companies from one sector is exposed to the same setbacks.
- Currency risk: for shares in a currency other than the euro, the exchange rate can affect your return.
- Tax: dividends are taxed. Take this into account when calculating your net income.
Conclusion
Dividend stocks can provide a recurring income, but the dividend is not fixed and the price can fall. If you can calculate dividend yield and look at payout ratio, dividend growth, diversification and costs, you can compare stocks better. Always decide based on your own situation and goals.
Disclaimer: Investing involves risk. You may lose (part of) your investment. This article is information and not investment advice. If in doubt, contact a financial adviser.