What Are Dividend Stocks?
Investing in dividend-paying stocks is a common investment strategy. Dividends are essentially free money, though taxes do apply. But how do you know which stocks will pay dividends? Companies that pay dividends tend to be larger and more established. It is far less likely for newer companies to pay dividends. This is because newer companies may struggle to make consistent profits and the companies (and their shareholders) receive a bigger advantage from reinvesting funds from profits than from paying dividends.
Companies pay out dividends as a specific amount per share. Generally, the amount per share is only a few cents, but if you own a hundred or a thousand shares, the value obviously becomes greater. Companies typically have a fixed calendar for paying dividends but may choose to announce a dividend payment at any time. The idea is to reward you for choosing to be an investor in their company, while also increasing confidence in the company. Ideally, if the company has high enough profits to distribute some to shareholders, it must be doing well.
A stock that pays dividends is not necessarily better or worse than one that does not. If a company has a clear plan for growth that requires reinvestment of funds, this strategy may ultimately prove more valuable to the shareholder in the long run. This is because shareholders may earn more from a large growth in the stock of the company than they would from a small dividend payment. If you only invest in dividend stocks, you’ll likely miss out on other investment opportunities, such as mutual funds and other equity securities. That’s why it’s important to have a diversified portfolio. That being said, dividends have many benefits, so there are plenty of good reasons to include them as part of a diversified investment portfolio.