Stock Market Investing: What Are Dividends?
For investors who seek growth and income, the buy-low, sell-high approach is not always the right strategy for consistent return on investment. Of course, the role dividends play in your investment decisions is largely dependent on your investing goals. Larger, established companies tend to issue regular dividends as they seek to maximize shareholder wealth. However, smaller companies– instead of paying dividends to investors– may channel funds back into the growth of the company.
Definition of dividend (source):
Distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.
Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from the fixed schedule dividends. Keep in mind, dividends are generally paid on a quarterly basis and can be raised, cut or eliminated at each interval, so dividends should be one of many factors to consider when investing in a company.
To keep your money growing as quickly as possible, many experts recommend reinvesting your dividends rather than spending them when they are received. Most investment brokers or brokerage services will allow users to sign up for a dividend reinvestment plan (DRIP), which will automatically reinvest dividends back into their investments.
According to Tradersfly correspondent Sasha Evdakov, dividends can be a great perk of a healthy company, but don’t become overly excited by them because they do not necessarily mean a healthy stock. Check out the video here to learn more about the pros and cons of dividend investing:
Additional resources on understanding dividend investing:
The Ultimate Dividend Playbook: Income, Insight and Independence for Today’s Investor
Investing In Dividends For Dummies (2015)
Dividends Still Don’t Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market