A dividend is a way for investors to receive some regular income from their investment in a company. When an investor buys shares of stock, they are now a part owner of the company. When a company generates a profit, the company board of directors may decide to share the profits with investors by paying a dividend. Dividends are typically paid out on a quarterly basis. The company is under no obligation to pay a dividend. It is their choice and the amount paid out is their choice.
To simplify, companies fall into 2 categories: growth or value (income.) The companies that are growing will take profits and reinvest in the company to help continue the growth of the company. Investors are fine with that as long as the company grows and it is reflected in the share price increasing. If a company doesn’t grow, investors lose interest in the company. The company will typically look to pay a dividend in order to keep investors interested in the company. If the company is not able to use its profits to grow the company and receive a good enough return on investing in itself, then the alternative is to share the wealth and payout a dividend.
On http://finviz.com/ , you may pull up any stock and see what the company has paid out annually for a dividend. This is on a per share basis. You are also able to see the dividend yield as a percentage amount for the year. As an example, let’s say an investor buys 1 share of a stock for $100. In the last year, the company has paid out $2.50 per share in the form of a dividend. $2.50 would represent a 2.5% yield based on a $100 investment by purchasing the share.
Most dividend paying companies only give a 2-3% yield so it is not a way to get rich. In fact, you may be better off with a long term CD. However, if the company’s share price grows as well, then a dividend is a nice bonus.
If the dividend yield is exceptionally high, be leery. The yield is based off the current stock price. If the company is facing hard times, they may lower the dividend or eliminate it all together. If the stock price loses half its value in the year, a nice 20% dividend yield won’t be enough to offset the loss in your stock value. Make sure you do not focus on just the dividend payout or yield, but look at the company as a whole.
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