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What Is A Dividend?

What Is A Dividend?

By Shaun Rosenberg

A dividend is a small payment that stocks pay their shareholders every month or quarter based on their earnings. Holding stocks that pay out a dividend is a terrific way of building up your wealth and creating some passive income at the same time.

But why exactly would a company want to start paying out a dividend? It seems like they are getting the short end of the stick. Would you want to pay someone money every month or quarter.

Well there are actually a few different reasons why companies pay out dividends. First of all it just makes sense. When you buy a stock you are actually buying a portion of the company. If you own a share of the company, no matter how small that share may be, you still deserve to collect some of the profits that the company turns up.

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.

Most companies will actually raise their dividends even when the company is not making any money with the hope that the demand will come and save the company. Watch out for this, you don't want to buy a company just because of the dividends.

So, now that you know a little bit about it, is it worth investing into dividend stocks? Well of course, but make sure that it is not your only reason for investing into it. It makes a nice bonus, but is not the only thing to look for.