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A Simple Primer on Investment Dividends

In order to become an experienced investor, it is important to learn the ins and outs of investment dividends.

Learning the language will help you think more like an astute investor. We’ve introduced you to the most important investing terms. Today, we’re looking at investment dividends:

  • What are dividends?
  • Which companies pay dividends?
  • What should we avoid when adding them to an investment portfolio?

What are investment dividends?

When you invest in a company, you become a shareholder and own a small piece of that company. As a shareholder, you have the potential to earn money through the company’s profits.

One way to earn money from your investment is through cash or stock dividends.

Investment dividends are payments made by a company to its shareholders out of its profits or reserves.

  • These payments are usually made quarterly.
  • Some companies pay them monthly or pay annual dividends.
  • Companies pay dividends in cash or in additional shares of the company’s stock.
  • You usually get to choose whether you take cash or stock dividends.

Which investments pay dividends?

Companies that pay dividends are usually mature and stable. They are consistently profitable and have enough cash on hand to distribute some of it to shareholders. Companies in growth industries or startups usually reinvest their profits back into the business instead of paying dividends.

The amount of dividend you receive depends on the number of shares you own and the dividend per share. If a company pays a $0.50 dividend per share, and you own 100 shares, you will receive $50 in total.

Dividend payments are not guaranteed, and companies can choose to reduce or eliminate them if they experience financial difficulties. Research the company’s financial stability and track record before investing. This is important to ensure that they have a strong history of paying investment dividends.

Investing for Income

Dividends can be a reliable source of income for investors. This is especially true for those who rely on their investments for retirement or other financial objectives. Dividends can also help to reduce the impact of market fluctuations on your investment portfolio.

In addition to providing income, investment dividends can also indicate the financial health and stability of a company. A company that consistently pays dividends is usually well-managed and has a solid financial foundation. On the other hand, a company that cuts or eliminates its dividends may be experiencing financial difficulties or facing other challenges.

A Word of Caution About Dividend Investing

Beware of the promise of high dividend yield. A 15 percent annual dividend may look tempting, but is typically not sustainable. It usually happens when a company’s stock price falls. If a normal yield suddenly looks too good to be true, it probably is.

Our advice: do your homework when scanning for dividend paying companies. Select only those that are financially stable and have an excellent history of delivering consistent and growing dividends. Reach out to us if you need help finding good dividend paying companies or exchange traded funds for your portfolio.