Everything you need to know about
dividend stocks in Australia

Looking for an additional way to earn passive income as you invest? Find out more about dividend stocks, how they work and how you can start investing in them with eToro.

Exploring the world of stocks can be an exciting way to grow your wealth and set yourself up for a more comfortable retirement.

The sheer diversity of markets and different asset areas means you can align your investment decisions with your risk score. Moreover, you can invest in established companies that pay regular dividends to their shareholders, known as dividend stocks, for long-term investment purposes.

Does that sound like an intriguing way to earn a passive income over time? In this guide, you’ll learn all about the value of dividend stocks as part of building your portfolio, the type of due diligence you should do before investing, as well as get an introduction to dividend tax in Australia.

What are dividend stocks?

When you start investing in stocks, you essentially become a “part-owner” in the businesses in which you are investing. In the traditional sense, your share of the profits from that “part-ownership” is paid out via dividends. However, not all companies pay out dividends. In fact, the majority of them do not.

Consider that there are two different types of investors. The first is someone who wants to grow their wealth through positive price movements of their investments — aka capital gains. The second investor wants to grow their wealth through a passive income from their investments — aka dividends.

Tip: Set financial goals and create a plan before you invest to help mitigate risk.

Unlike the highly volatile penny stocksthat are often traded, stocks that pay out dividends to their shareholders are usually those of well-established companies with a long history of distributing their profits back to their investors.

This is why stocks are usually viewed as being either “growth” (i.e., companies that put profits back into the business for future growth) or “yield” (i.e., well-established organisations that do not need to rapidly expand so they can disperse a portion of their profits to their shareholders).

That means you cannot simply start trading on the eToro platform or app and expect to earn dividends from every stock in which you invest. On the contrary, choosing dividend stocks is a long-term investment strategy for most traders. So if you’re deliberately looking for dividend stocks, you’ll need to conduct your own due diligence and research the listed companies that historically pay out dividends to shareholders.

How do dividend stocks work?

So, you want to start building a portfolio with dividend stocks in Australia — or maybe you have already invested in a few different companies that pay out dividends from their profits. How does it actually work?

The first step is to research whether the company in which you are investing will pay out a share of their profits or earnings to their shareholders. If they do, then they will usually pay dividends twice a year — an interim dividend and a final dividend.

However, companies may choose to pay out dividends more or less frequently depending on a variety of factors such as their historical payout schedule, whether they met profit expectations that year, and other considerations. What is most important to know is that companies are under no obligation to pay dividends from their earnings, and they might simply choose to reinvest those profits back into the business.

Identifying dividend stocks

Not all companies pay dividends. This means that you’ll need to do some research to identify dividend stocks.

While there are many ways to find out whether a company does pay dividends, some of the simplest include referring to our dividend calendar, which lists companies that are about to pay dividends, and exploring our information pages, which provide overviews of the dividend policies of most major companies. The company’s investor website and that of the stock exchanges on which the company is listed can also be valuable resources.

Tip: Blue chip stocks are a popular choice for dividend investors, as they typically pay dividends and are a stable, established option.

Find the best dividend stocks by calculating the dividend yield

Once you find a dividend stock in which you’re interested, it’s now time to determine the dividend yield. For many investors, this calculation is the most important metric for choosing the top dividend stocks. It’s represented as a percentage and will show you how much you can expect a company to pay its shareholders in dividends every year.

How do you calculate the dividend yield? It’s actually quite simple and is worked out by dividing the price of the annual dividends by the current share price. For example:

Example Company
Interim dividend amount	$2.00
Final dividend amount	$3.00
Current share price	$82.50
(2.00 + 3.00) / $82.50 = 0.061 or 6.1%

Tip: If you are holding a dividend stock that makes a payout, the amount will be credited to your eToro account.

What should you look for in dividend stocks?

Now that you have a thorough understanding of what dividend stocks are and how to calculate their yield, it may be time for you to start investigating some companies in which you want to invest.

Everyone has their own unique investment strategy and risk profile, so there is no one-size-fits-all solution for finding the ideal dividend stocks. However, there are a few key methods that may help you determine which — if any — global or Australian dividend stocks would be a good addition to your portfolio.

You may choose to research if a company has any of the following:

A competitive dividend yield

What percentage can you expect to receive from ongoing dividends? If the percentage is high relative to other stocks, then you might decide to invest more heavily in that company for larger annual payouts.

Strong dividend payout ratios

What are the dividend payouts relative to the company’s earnings?

Any competitive advantages

What does this company have that its competitors don’t? What is it doing better in the current market that allows it to make a profit that is then distributed among its shareholders? Uncovering the major competitive advantages could help you decide on one dividend stock over another simply because it feels like the better long-term investment.

A history of raises

Look not just at the latest dividend amount, but go back a number of years and see if there’s a trend of rising payouts. If the opposite is true, consider whether the dividend amounts will meet your personal investment goals for the short and long term.

Steady revenue and growth

You will find that a listed company’s relevant finances — such as revenue and growth statistics — are freely available, so it can be beneficial to explore this data and use it to inform you whether or not to invest in this company. If you are looking for a long-term dividend stock, then a company with steady revenue and growth could influence your decision.

Low debt levels

Fast-growing companies tend to excite investors, but beneath the surface, there can be drawbacks — such as significant debt — that may hamper their sustainability over the coming years and decades. A company with low debt levels is not only an indicator of an established market presence and customer base, but it may also be relevant to the stock’s dividend yield.

Again, you may decide that some factors are more important than others in determining whether a dividend stock is the right pick for you. Maybe one company is offering larger dividend payments, but is inconsistent with its payout history. Alternatively, if you are a more conservative investor, then a company that has consistently low debt levels may seem like the safer bet for a long-term investment.

What are the pros and cons of dividend stocks?

There are a variety of pros and cons that accompany dividend stocks. While they may vary depending on your investment, it’s important to note the advantages, disadvantages and risks of this type of investment.

Advantages

• They can offer a relatively stable return. Some mature, established companies distribute dividends regularly.
• They can provide a passive income stream. To receive dividends, there is not much effort involved apart from purchasing the stocks themselves.
• The returns received can be used in many different ways. Dividends can be saved, spent or reinvested, depending on your personal preferences.

Disadvantages

• Fluctuating share prices. If the value of the stock you have invested in decreases, so, too, may the value of the dividends you receive.
• Changes to dividend distribution. Companies are not obligated to distribute dividends and can make the choice not to in some situations.
• Currency fluctuations. As with any investment, if the value of currencies rises or falls, it can affect the value of dividends.
• Past performance is not a guarantee of future performance. Even if a company has had strong dividends in previous years, it is not a guarantee that you will also receive strong dividends if you were to invest today.
• Dividends will vary in value from year to year. Influenced by the company’s overall performance, the value of dividends can differ every year.

What do you need to know about dividend tax in Australia?

In Australia, any dividends paid to Australian resident shareholders become part of their total taxable income and will be taxed using the tax rate assigned to their earnings bracket:

Taxable Income	Tax on this income
0 – $18,200	Nil
$18,201 – $45,000	19 cents for each $1 over $18,200
$45,001 – $120,000	$5,092 plus 32.5 cents for each $1 over $45,000
$120,001 – $180,000	$29,467 plus 37 cents for each $1 over $120,000
$180,001 and over	$51,667 plus 45 cents for each $1 over $180,000

 

However, to help prevent double taxation on Australian dividend stocks, some dividends may be franked.

If a domestic company has already paid tax on dividends, franking credits, also known as imputation credits, will be assigned to shareholders to ensure they are not paying additional tax that has already been paid by the company. These credits are used at tax time by shareholders to receive a tax rebate.

Dividends may also be unfranked, meaning that the company has not already paid tax on them, or partially franked, where tax has been paid by the company on a portion of the dividend.

For the latest information on dividend tax in Australia, head over to the Australian Tax Office website.

How to start investing in dividend stocks in Australia with eToro

Once you’ve chosen which dividend stocks you want to invest in, it’s very simple to buy company shares with eToro. In fact, there are only three steps to start investing in dividend stocks in Australia with eToro:

1. Open and verify an eToro account.
2. Search a company name that offers dividends and buy your desired amount of shares.
3. Periodic dividends will be credited to your eToro account — no action required!

eToro also offers a demo account with funds up to $100,000 that you can practise investing with before using your own capital.

There’s so much more to the stock market than just buying and selling shares. For many Australians, bolstering their portfolio with well-established stocks that provide ongoing dividends helps them generate a passive income. If you’re ready to get started with dividend stocks, eToro is a user-friendly trading platform that will support you through your investment journey.

Join eToro today to invest in leading stocks.

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