What is a Dividend?

What if I told you that you could generate guaranteed CASH by investing in the stock market? There is a way! And it’s called dividend investing.

Dividends are payments that are periodically made by companies to shareholders. Typically, dividend payments are made four times a year — once every three months. However, some companies pay dividends every month or twice a year.

It may seem strange why a company would pay someone just for holding shares of the company. Dividends are a way that companies can distribute profits to shareholders, who are the collective owners of the company.

People who invest strictly in dividend stocks are typically older, retired, or have a low tolerance for risk. Many companies that pay dividends are established companies in their industries and don’t see much volatility (how large a stock moves up or down), making them stable investments. Some people invest in dividend stocks because they just want the steady stream of income! Deciding if dividend investing is right for you depends on your personal financial goals.

A major concept of dividend investing is the dividend yield, which is the percentage of the stock price that is paid in cash to the shareholder. Dividend yield is calculated by dividing the annual dividend payment by the stock price. Let’s try an example. Company XYZ trades for $100 per share and pays a dividend of $3 per share over a one-year period. The dividend yield would be 3% ($3/$100). Since most companies pay dividends four times a year, you would receive that $3 dividend in the form of four $0.75 payments ($3/4).

Generally, any company that pays a dividend is considered a safe investment due to the security of the income. However, companies with dividend yields higher than 3% are highly sought after because of their ability to generate an impressive amount of income!

Remember, even though companies pay dividends, the stock always has the potential to lose value. However, with good investment research and consistency, the more likely it is that your investment will increase in value!