| What are Dividends and How are they useful to You?

What are Dividends and How are they useful to You?

When you buy stock in a company you become part owner of the company.  Whether you own 1 share or 1,000 shares, you are an owner, but the person with 1,000 shares has 1,000 times the ownership that you have.  This is where stock dividends come in to play.

A dividend is what a corporation pays stockholders out of their net income.  This is optional and is not required of a corporation.  For example, if a company made a $2,000,000 net income it may decide to pay a dividend to its shareholders.  If they have 500,000 shareholders and they pay a 50 cent dividend, they will pay a total of $250,000 out of the $2,000,000 net income.

Dividends are most often paid on a quarterly basis.  They do not pay the same dividend every quarter.  It depends on how much net income they have and whether or not they have done any stock splits.  If they did a 2 for 1 stock split, the dividend will likely be half as much.

Most often companies that regularly pay dividends will always pay dividends because if they don’t, it’s a sign of a weakening company and therefore a likely decrease in the value of the stock.  Although, this isn’t a rule, it’s just common.

Dividends are another way to make money on the stocks you purchase.  You can sell the stock for capital gains, or you can hold onto it for a little while and collect dividends.  Often individuals who are close to or in retirement invest heavily in companies that pay high dividends but have low growth because they show stability and will hopefully continue to pay dividends on a regular basis.

Especially if you are young, you shouldn’t look only at the average dividend rate of a company to decide if it’s a company you should invest in.  Look at the overall company and see the dividends paid as an increase in the return on that stock investment.

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