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.

Generally speaking, a dividend is a distribution of a portion of a company’s earnings paid to the shareholders. 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.

What is a Dividend?

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.

Four Dividend Investing Tips

Find Companies With Strong Track Records When it comes to dividend investing, find companies with solid track records, meaning they are well established and have high market values.

Find Sustainable Dividends

Make sure you find a company that has a payout ratio in the 30% – 50% range as anything higher could be unsustainable, and anything lower means the company is more focused on growth than paying out dividends.

Annual Increase Streaks

The four dividend stocks noted earlier that they all have a long streak of annual dividend increases. So, yes, you might find stocks with higher yields, but that doesn’t mean anything if that company can’t sustain those yields or raise its dividends year over year.

Always Reinvest Dividends

Each time you reinvest your dividends, you’re buying just a bit more stock than the time before. So earning you more in dividends allows you to buy more stock, you see where this is going? Always reinvest.

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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