What is a Dividend? A Simple Explanation + 4 Tips

Whether you are just starting to invest or have been investing for decades, dividends can be a valuable part of anyone’s investing portfolio.

Dividends can provide income and growth for long-term investments. In addition, many times, there will be options to reinvest dividends back into the same company automatically.

Why Companies Pay Dividends Many companies that payout dividends are well-established and stable companies. By paying a dividend, they attract investors creating more demand for their stock.

Another reason dividends are attractive to investors is to generate passive income. Many times, retirees are looking to create more income for themselves. They don’t require the growth factor as younger investors, so they turn to investments to pay dividends to earn money during their retirement.

Why Companies Don’t Pay Dividends Many companies won’t pay dividends for several reasons, the biggest being it hurts their bottom line. That is much less cash the company has and is therefore much less valuable when paying out dividends. Usually, companies just starting up, like a new online business, are more mindful of their cash flow.

How Do You Earn A Dividend?

Earning a dividend is an easy feat to accomplish. The company will automatically pay to your brokerage account at distribution time by buying a stock or mutual fund that pays out dividends.

When Do Companies Payout

In most cases, companies pay dividends four times a year every quarter. However, companies can decide to pay out dividends at different intervals if they like. Monthly or yearly dividends are two other less common options.

Dividend Tax Benefits Dividends can have tax benefits for both the shareholders and the company giving them out. For the company, by giving part of their profits to shareholders, they won’t be taxed on that money, therefore paying less in taxes.

The rule for any investor should be to diversify, so dividend stocks certainly should have a share in your portfolio, but don’t strictly rely on them. If you’re simply chasing dividend yields, you may be missing out on the big picture or investing in a company that can’t sustain those yields.

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