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What are Dividends?

A dividend is where a company pays shareholders a slice of the company's profit. Dividends are like your share of the profit. Dividends are usually a set amount per share, so the more shares you own, the more money you will receive.

Dividends are usually paid quarterly if they are paid. Some companies pay a steady dividend that is closely related to the company's performance and other company's pay a more stable dividend where the amount is less correlated to the profit the company makes.

How are dividends paid?

Dividends are usually paid in cash. This cash can be reinvested in the company's stock, a different stock or taken as cash. There are some instances where dividends are paid as stock, but this is much less common.

Does it make much difference?

Yes, it really can make a significant difference in the long term. If we go back to the 1930's and look at the major stock indices, growth after inflation has been factored in isn't particularly high, it is around 2%. However, during this same period of time, dividends averaged around 3%, taking the return up to 5% per year.

Why am I going back to the 1930s? I know it is a long time period, but I just wanted to get across the significance of dividend payments over the long term. For short term trading, they may be much less significant.

Would would a company pay a dividend?

One of the main reasons is to make a company's stock more attractive to investors. This can increase demand for a stock and in turn increase the price.

Which company's pay dividends?

Dividends are often paid out by large well established companies that are unlikely to grow significantly. These are often some of the lowest risk stocks to buy. Investing profits back into the business is often not prudent. Examples of these companies include Exxon Mobil and Walmart. If you click on these links, you can see on google finance the dividends these companies have paid in the past.

However, with smaller companies that are still growing rapidly, it is often higher yielding to put the profits back into the business to aid further growth.

It is important to be aware that a company is never required to pay a dividend. Past dividend payments are no guarantee of future dividend payments.