What Is A Dividend?

A dividend is a small monthly payment that is made to shareholders every month or quarter based on the company’s earnings. Holding a stock that pays out a dividend is a great way of building your wealth and getting some passive cash flow while you are at it.

But, why would a company pay you a dividend? After all it seems like a raw deal for them, we pay them once and they pay us for the rest of our lives.

There are a few different reasons why companies pay out a dividend. The first reason being, that it is only fair to reward investors. When you buy a stock you are basically buying a portion of the company. As a partial owner of the company you should make money as the company itself makes money.

It wouldn’t make sense if you invested into a business and did not benefit when it made money. So you should benefit if you invest into the company’s stock and they made money.

A second reason companies pay out a dividend is to keep interest in their stock. Investors like to get paid just for owning a security. Why wouldn’t they it is free money after all? So by offering a dividend companies can actually attract more investors.

Companies know this and many will raise their dividends in order to create more demand for the stock and hopefully that added demand will be enough to push the stock up higher and make the company and the shareholders extra money.

Many companies will raise their dividends even when times are hard simply to get more investors coming in and hopefully bailing them out. Watch out for this and make sure you look for more when investing your stocks.

Now you know a little bit about how dividends work, but are they worth it? Yes, but only as a bonus. Dividends can be a great extra when it comes to stocks, but it should not be the only reason you buy a given stock.

stock market tutorial Also published at What Is A Dividend?.