What are dividends?

If you have ever invested your money or researched the topic, you will inevitably come across the term dividends. But what exactly are dividends? A dividend is quarterly payout a company makes to their shareholders.

The dividend is usually an amount for each share you own, so the more shares you own, the bigger the dividend. The amount is reflective of the companies profit during the quarter.

Some companies pay shareholders dividends regardless of how the company performs to give the shareholders a nice steady return, unless the company gets into significant financial difficulty.

Do all companies pay dividends?

No, it often older, more established companies that pay dividends. A company is never under any obligation to pay a dividend to their shareholders. Historical dividend payments are no guarantee of future dividend payments.

Why do companies pay dividends?

The main reason is to keep investors happy. Very large corporations are often are unlikely to grow massively, like many investors desire.

When a company no longer benefits significantly from reinvesting the profits back into the business, they often choose to share some of the profits with the shareholders.

By doing this a company’s stock can look more attractive to potential investors and therefore will increase demands and the price of the stock.

Does it really make much difference if a company pays me a dividend?

Yes, it can do. The Dow Jones Industrial Average has gained around 2% per year (inflation adjusted) since the 1930′s without dividends included. The figure is around 5% per year with dividends.

So, in the long term the dividends can sometimes make up a bigger portion of the gains made by a stock then the actual price increase itself.

Large, well established corporations that consistently pay dividends often offer the investor one of the safest stocking investing opportunities. With these stocks, the investor has a relatively low risk of the stock losing significant value.

Naturally, these type of stocks are not going to earn you massive returns, they are more likely to be safe. If they are right for you personally depends on your risk tolerance and stock investment strategy.

How are dividends paid?

Most commonly, dividends are paid in the form of cash. You can reinvest the cash back into the company by purchasing additional stock.

Less commonly, dividends are paid in the form of stock.