In our last post, we talked about investment strategies.

The next step in our 10 step buying process is to choose one of these strategies and identify shares appropriate to our chosen strategy.

By way of example, we will choose to go with a strategy of investing in shares which pay high dividends and explain how to go about finding suitable shares.

What is a dividend?

A dividend is a sum of cash paid to shareholders out of the company’s profits (but not always) usually at the time of the company’s results and are a way of rewarding shareholders for investing in the company’s shares.

Some companies don’t pay dividends, either because they are not making sufficient profits to do so or because they want to invest their cash internally to grow their business.

Other companies may only pay dividends once a year at the time of the final results.

Some very large companies e.g. Royal Dutch Shell, pay dividends four times per year, however it is more normal for companies to pay dividends twice.

Once with the interim results (1st 6 months) and a slightly higher amount at the year-end with the final results.

Dividends are usually a few pence per share.

So the more shares you have in a company, the higher your dividend payout will be.

What do we mean by high dividend shares?

Shares that pay high dividends are also called high yielding shares and this gives us a clue about how to identify them.

We need to look for shares with a relatively high dividend yield.

We also need to make sure that the company can afford to pay the dividends, not just now but on an ongoing basis.

We therefore need to look for shares with a comfortable dividend cover.

Ideally, we also want to find a company which pays a high proportion of its annual profits to shareholders as a dividend rather than by investing its cash internally as we mentioned earlier.

So we need to look for shares with a high dividend payout ratio.

We explore these three metrics or ratios next time and explain how to use them to find shares that pay high dividends, otherwise known as high yield shares.