The Advantages of a Cash Dividend

Receiving cash dividends is one of the best things about investing in stocks. Cash dividends provide you with a few benefits when compared to a dividend reinvestment program. A cash dividend is a payment that is received in the form of a check from a company. Cash dividends are basically a way for the company to share the profit with those that have put money into the company.

Income

One of the biggest advantages of cash dividends is that they can provide you with a steady source of income. If you built up a large enough portfolio of dividend stocks, you could live on the dividends that they provide. For example, let's say that you had a portfolio of $1 million in stock. If the shares of stock paid you an average of 4 percent in dividends, this would be $40,000 a year that you receive in dividends.

You will still have your ownership in the stock and you could sell the stock if you need to. However, if you could hold the stock, you will be able to receive a steady stream of income. If you mix and match your stock between different companies, you could potentially get dividend checks every month.

Market Hedge

Another reason that you might want to invest in companies that pay cash dividends is that it can be a good hedge against the stock price declining in the market. One of the most common valuation multiples that investors use to decide which companies to invest in is the dividend yield formula. This formula is calculated by taking the annual dividend per share, and dividing that by the current stock price in the market. Therefore, if the price of the stock decreases, this will increase the dividend yield ratio. This is attractive to investors and the available shares in the market place are most likely going to be purchased rapidly because of this. This will bump the stock price backup to reasonable levels.

Conservative Companies

When a company has to continually issue cash dividends, they will be more conservative with their company finances. The company will be more cautious when it comes to taking on debt or doing anything that could jeopardize the amount of cash they have access to. The monthly debt will force them to take stock of their regular distributions. You want to invest in a company that does not spend too much money or grow too quickly to avoid failure.

Solid Companies

Another good reason to invest in companies that issue cash dividends is that you will be investing in a financially sound company. Most of the companies that issue regular dividends are already well-established in have good potential for the future. If a company is not willing to issue a dividend, it may be because they are not yet established. They might feel like they need to hold extra money so that they can avoid getting close to bankruptcy.

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