My Take on Investing in Shares as Recession Causes Companies to Suspend or Cut Shares Dividends
Did you hear that companies like Ford motors, Dicks sporting goods, Delta, Marriott hotels resort and suites, Carnival, and others have decided to cut their dividends or suspend it for now?
Introduction
You might be asking what this is, some people might even wonder what a dividend is; let me help a little. A dividend is an amount paid by a company annually, quarterly or in three months (depending on the company and when they pay their dividend) to shareholders from the profit made in the company. In other words, if you buy a shares from Apple or any other publicly traded company, then you own a part of the company and the company pays you dividend in cheques to your broking account every time they will be distributing it. Which means you got a passive income. Warren’s Berkshire Hathaway made $640 million in dividend for investing in Coca-Cola in 2019.
When you invest in shares of a company that distributes dividends to its investors, you get passive income and this income is determined by how many shares you own. The more shares you buy the more dividend you make. You can either withdraw your dividend to pay for a mortgage or do any other thing, or you can invest your dividend into the company to buy more shares or buy another shares of another company if it can buy it. Do not forget that not all publicly trading companies pay dividend, most growing companies or startups do not pay their investors dividend because they are still expanding. Companies like Uber, Lyft, Beyond meat and so on. This companies want to grow their stock and after which they have a good stock price.
Dividend Cut
After the simple explanation, let me continue. With the Pandemic and the threatened recession, if you were thinking of getting some dividends this year, you might just hold on a bit. With the threatened recession, most companies are scared of having a low liquid cash and with this fear, companies do not want to give out money to shareholders as they want to be safe and have physical cash in case there is an emergency. During the last recession, companies especially banks stopped giving dividends and with dividend being cut, investors do not like to hold on to their stocks. They out rightly start to sell out of panic. Well, on a sincere note unless you are a trader, investing in a shares that wouldn’t give dividend isn’t attractive.
My Take on this
A lot of people will sell their stocks as this is becoming more serious. About 23 international companies in the United States have either cut or stopped paying dividend. In 2008, this same thing happened and people sold their stocks and the stock market dropped. There were no dividend paid in most companies in 2008 -2010, but people who still bought into the shares of strong companies did not regret their actions as companies started paying dividends again in 2010 and by 2012, dividend pay value came back to normal and the price kept increasing till 2020 when the pandemic came in.
Since companies already stopped giving dividends, it is certain that the stock market will tank real bad and for opportunity hunters, this is a good time to buy at a cheap price so when the market stabilizes, you already started earning dividend. In the nearest future when company start making good interest, the price of the shares will rise and so will the price of the dividend and at that time, people might want to start buying but they will be buying at a higher price compared to this period. So if you buy a strong company like ford now, you will be buying low, and in the nearest future when the company is making more money, you will be enjoying the benefits of buying and holding.
Disclaimer: This post should not be seen as an investment advice but should be viewed for information purposes. If you need any advice for investing, please contact a financial advisor
