Understanding Stock Dividends

Understanding what stock dividends are can be valuable information to you as an investor. Stock dividends have the ability to transform your portfolio and bring you a great return on your investment. Here are the basics of what stock dividends are and how they can help you as an investor.

What Are Dividends?

Stock dividends are a payment that is made from a corporation to the shareholders of the corporation. Many companies engage in this practice regularly. The money to pay the dividends comes from part of the profit of the company. All of the profit for the company is not necessarily paid out in dividends; some of it is retained or invested back into the company. Traditionally, dividends are disbursed on a quarterly basis. However, some companies issue them on a yearly basis. Others offer them every single month. Therefore, you will have to clarify the frequency of the dividend with the particular company that you purchase from. 

Why Dividends Are Issued

You may be wondering why a company would pay their shareholders a dividend. One reason is that the shareholders are considered part owners of the company. When a company realizes a nice profit, it is only natural to share the profit with the owners of the company. 

Some companies do this to make their shareholders happy. Getting a nice source of residual income increases shareholder loyalty. It will also entice others to buy stock when it becomes available. The fact that a stock pays a dividend can help increase the price of the stock, which also helps the shareholders. 

Other companies issue a dividend as a show of strength. Issuing dividends is an optional practice. If times are tough, some companies will cut out their dividends all together. However, companies that are doing well issue their dividends to look financially strong. 

Benefits to Investors

  • Low volatility--When a company issues a regular dividend, it can provide you with a low volatility on your investment. You do not have to worry about the up and down movements of the price of the stock as much. You can rely on your dividend payment to provide you with a nice return. 
  • Residual income--One goal of many investors is to create a residual stream of income. With dividend stocks, you should be able to do this easily. If you buy a monthly dividend stock, you can get a frequent payment without doing any actual work. 
  • Faster compounding--Many investors take the dividends that they are issued and immediately use the money to reinvest in stock. When you do this, it helps you to compound your investment even faster. The size of your dividend payment depends on how many shares you own. Therefore, when you buy more shares every time a dividend is issued, you will get an even bigger dividend payment next time.
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