Invest in dividend assets on eToro
Start now
Invest in dividend assets on eToro

Register for an eToro account and start investing in dividend assets.

Start now

Your capital is at risk. Other fees apply.

Dividends have the potential to generate passive income for your portfolio, and can be an attractive option for long-term investments. Use this summary of our Dividend Investing Strategies course to recap the fundamentals of dividends, consolidate your understanding of how dividend-paying assets work, and refresh your understanding of how to successfully incorporate them into your wider investment strategy.


What are dividend investments and how do they work?

When a company decides to pay dividends to shareholders, the stock is known as a dividend stock. Dividends can take the form of a cash payment, or additional shares in the issuing company.

Dividend investments are a popular long-term option for investors keen to generate passive income, or benefit from the compounding effect (whereby returns grow exponentially over time due to dividend reinvestment).

To assess the potential returns on a dividend investment, investors will typically use the dividend yield metric. This is calculated by a formula that displays the size of an annual dividend payment as a percentage of a stock’s current share price.

  • Dividend Yield = Annual Dividend / Current Stock Price

It is important to remember that dividend yield should not be relied upon as a certainty. The analysis relies on an assumption that a company’s historical dividend payments can predict future payments, which is not always accurate. 

How to invest in dividend-paying assets?

There are various ways to invest in dividend-paying assets, ranging from buying a single stock with an established track record of paying dividends, to purchasing a fund that holds a basket of similar dividend stocks.

There are many dividend-paying stocks available, but “dividend aristocrats” and “dividend kings” are terms often used to describe those deemed to be the most stable dividend payers. Fund dividends are a way for investment funds to distribute a share of their operating profits to shareholders.

Investors can use a Dividend Calendar to identify upcoming dividend payments.

Fundamentally, the decision about how to invest in dividend-paying assets comes down to your individual investment goals and strategy. Consider some of the differences between fund dividends and stock dividends, to make a well-informed decision.

CharacteristicFund DividendsStock Dividends
Automatic vs Staggered PaymentsStaggered payments may occur in fund dividends to streamline processes.Stock dividends are automatically paid on the dividend payment date.
Date of PaymentFlexible time frames: monthly, quarterly, or annually.Typically set dates determined by the issuing company.
Type of DividendInvestors may receive dividends in cash or stock as specified by the fund.Investors can choose cash or stock dividends with individual dividend stocks.
Costs and PracticalitiesManagement fees are applicable; offer diversification benefits.No additional management fees; requires individual stock selection and purchase.

Building and managing a dividend portfolio

Building and managing a dividend portfolio involves creating a reliable income stream through dividend investments, which can include various asset types beyond just dividends. 

As with all types of investment, dividend investing involves inherent risks:

Dividend SustainabilityInvesting in companies with unsustainable dividend policies can lead to dividend cuts or suspensions during financial difficulties or declining earnings.
Market and Economic RisksDividend stocks are subject to overall market volatility, economic downturns, and sensitivity to interest rate changes. Economic recessions or industry-specific challenges can impact companies’ ability to maintain dividends.
Industry RiskConcentration within specific sectors exposes a portfolio to sector-specific challenges such as economic shifts or technological disruptions.
InflationDividend income may not keep pace with inflation, eroding purchasing power over time.

Managing these risks effectively is crucial to building a successful dividend portfolio, optimised for resilience, stable income, and long-term growth irrespective of market conditions. To do so, investors should:

  • Diversify investments across sectors, industries, and regions. 
  • Evaluate companies based on dividend history, payout ratio, and financial health.
  • Regularly monitor macroeconomic trends and market conditions.
  • Define an exit strategy and regularly review portfolio performance.

Incorporating dividends into your investment strategy

Creating a dividend investing strategy involves leveraging regular dividend payments to support overall returns through compounding. This strategy can be optimised by diversifying across sectors, regions, and market caps to mitigate risks.

Key strategies include:

Dividend Reinvestment Plan (DRIP)Opting to receive dividends as additional stock to benefit from compounding.
DiversificationSpreading investments to reduce single-stock risk and navigate market cycles effectively.
Dividend CaptureBuying stocks before ex-dividend dates to maximise dividend income, although this approach may have drawbacks such as trading costs and potential capital losses.

Choosing the right strategy depends on individual investment goals. For instance, younger investors may favour DRIP for long-term growth, while retirees may prefer dividend capture for short-term cash flow. 

Ultimately, aligning strategies with personal objectives and staying adaptable to market conditions is crucial for successful dividend investing.

Final thoughts

Now that you have completed the Dividend Investing Strategies course and understand the fundamentals of investing in dividend paying assets, you are well-poised to start your dividend investment journey. 

Ultimately, it is up to you as an investor to decide how much capital you want to allocate to dividend investments. There is no right or wrong, and your approach should align with your overall investment strategy, risk profile and financial goals.

Consider consolidating your understanding by taking a second look at any of the articles, testing your knowledge with our course quiz, or making your first dividend investment now.

GREAT JOB!

Test yourself on what you have learned

Take a Quiz

QUESTION 1 OUT OF

What happens if you hold a stock on the record date?

You are notified that you should sell the stock before the ex date to receive dividends.
You receive any applicable dividend payment, regardless of when you bought the stock.
You are no longer eligible to receive the dividend.
 You receive the dividend payment one week earlier than other shareholders.

Correct!

Incorrect!

How is dividend yield calculated?

Dividing the stock price by the number of dividend payments
Multiplying the annual dividend by the number of outstanding shares
Dividing the annual dividend by the current stock price
 Adding up all dividend payments made by the company

Correct!

Incorrect!

Which type of company typically pays dividends?

Startups with high growth potential
Large blue-chip stocks
 Tech companies with innovative products
Companies with low profit margins

Correct!

Incorrect!

What is one advantage of investing in a dividend fund over buying individual dividend stocks?

Lower expense ratio
Greater potential for outperforming the market
Ability to gain exposure to multiple stocks with one click
Automatic dividend reinvestment

Correct!

Incorrect!

Why does Warren Buffett heavily weigh towards dividend stocks?

To maximise growth potential
To achieve high short-term returns
To reinvest dividends for portfolio growth
To avoid taxes on dividends

Correct!

Incorrect!

What is the main goal of a dividend capture strategy?

Generating capital gains through stock appreciation
Buying stocks just after their ex-dividend date
Generating dividend income by timing stock purchases around the ex-dividend date
Holding onto stocks for long-term growth without considering dividends

Correct!

Incorrect!

You can do better.
Not Bad, ready for more
Great score! Well done.
/
It looks like you haven’t yet mastered these topics. Revisit the course, paying attention to bolded sentences, tips, and highlights. These key points will help solidify your understanding. Keep at it, and you’ll see progress in no time. Good luck!
You’re on the right track! Consider trying another course to consolidate your knowledge, paying attention to bolded sentences, tips, and highlights. Understanding key points will help solidify your knowledge. Keep going, you’re almost there!
Congratulations on your high score! You’ve grasped these topics well. Keep up the great work by exploring another course in the eToro Academy. Well done!
Go To Courses

This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.

This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.

eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.