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Dividend stocks that can help to increase your income diversification

Dividend stocks that can help to increase your income diversification
A dividend is a payment made from a company’s excess profits to shareholders after income statements have been completed and come in the form of shares, rather than cash. These are often paid out quarterly (on a predetermined date) and can often be withdrawn or reinvested at the individual’s discretion. As shareholders can enjoy a whole host of benefits, interest has been growing in dividend stock trading in recent years.

What are dividend stocks?

When traders decide to add new assets and trading vehicles to their arsenal, stocks that provide dividends can be a low-effort yet lucrative option. Stock distributions are generally fractional and are awarded per existing share, so the more shares you have, the better. As with any trading method, there are downsides to be considered before putting your finances forward, so here’s a quick rundown of both the pros and cons. It’s important to note when leveraged trading you don’t get the dividend from the share itself since you don’t own it. Instead, you receive the equivalent adjustment as long as it was traded at the relevant time.
Pros:
  • Regular payment intervals and the potential for stock appreciation
  • Better-stabilised stock prices
  • Dividends can be leveraged
  • Stock dividends are not subject to tax until shares are sold
Cons:
  • Capital appreciation is low
  • Dividend payouts are not guaranteed
  • The market can still be volatile despite the pros
  • High dividends could be an indicator of financial discourse
  • Some are initially subject to selling restrictions

Leveraged dividend stock trading and its risks

Those trading dividend stocks may want to consider leveraging to support their efforts. Usually, this has an appeal when taking up more expensive positions on the stock market, but in the case of dividends, it can allow traders to instead purchase more shares to increase their trading potential. The risks remain the same however; if you use a margin to buy and earn more, you will also be upping the potential cost if losses occur. Click here for more information about dividend stocks.
Before placing trades, make use of a demo account to practice trading strategies. Ensure you carry out research into companies and utilise stop losses to protect yourself from significant losses.

Top dividend stocks in the UK

It will be important to do some research on trading with dividend stocks before getting started. Three of the key things to look out for are a low payout ratio to earnings, a history of steady growth in payouts and a balanced dividend rate in comparison to other companies. When stock dividends and payout ratios are high, this could be a sign of financial issues within the company. In many cases, high dividend yields mean share prices have dropped and this isn’t a good sign for the company or its shareholders.
The good news is that there are plenty of opportunities out there for traders of all skill levels to make well-educated decisions when selecting the right company. Some of the leading names in the UK current market are:
•            Imperial Brands
•            Polymetal
•            BP
•            Legal & General
•            British American Tobacco
•            Persimmon
•            Aviva
Although each of these tick all of the right boxes, it can still be worthwhile to opt for the one that offers the best rewards and incentives for your specific needs. After all, every trader is different and what works for one won’t necessarily work for another.

Are stock dividends better than cash dividends?

As the name suggests, cash dividends pay out money instead of stocks. While earning cash may sound like a better idea than obtaining shares, trading in stocks is a more well-rounded option for many. This is typically because when companies pay their dividends in cash, their economic value becomes reliant on shareholders as opposed to the company itself - and they could be the ones losing out if stock prices drop. When cash is withdrawn, there will be yearly tax implications to factor into overall profits, too.
Stock-based dividends can prove to be more fruitful long-term, as companies that award shares are often still growing. This could see a higher financial payout for the future than the sum of multiple ongoing cash payments. These companies are sometimes able to perform better by keeping their cash to reinvest in their continued success also. With stock-based dividends, there is no taxation to consider either, until the shareholder decides to cash out. There are plenty of companies out there that use stock dividends that allow traders to cash out at any time, but those that don’t offer this feature are often preferred by those who select stock-based options.
Tax treatment depends on your individual circumstances. Tax law can change or may differ in a jurisdiction other than the UK.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Please note that past performance is not a reliable indicator of future results.
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Image banner credit:  Image by Gerd Altmann from Pixabay
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