Not every stock pays a dividend, so what are the advantages of investing in stocks that do pay dividends?
At first glance, it may seem that the answer is simple: of course you want to invest in stocks that pay dividends.
However, it's not quite that simple. First, let's quickly review some facts about dividends.
- Dividends are paid out of a company's earnings (profits)
- Dividends represent a payment to company owners (shareholders)
- Dividends are pay quarterly in most cases and are approved by the board of directors annually
- Dividends are usually paid in cash, however they can also be paid in additional shares of stock
- Dividends are usually expressed on a "per share" basis. For example, if a company declares a $2 per share dividend, each shareholder will receive $0.50 every quarter for each share owned.
There is more information on dividends here.
In addition to a regular source of income, dividends help you through periods of high volatility in the stock market.
The price of the stock may bob up and down, but, in many cases, companies continue paying a regular dividend. This is added income you can count on unless the company falls on hard times.
Companies that pay a regular dividend are usually large and well-established. The stock price may suffer, but the company is still able to pay out a regular dividend.
Depending on what you paid for the stock and how large the dividend is, you may find that after a period of years, the dividends have returned your original investment in the stock.
Your portfolio should be well-balanced with large and small companies as well as companies representing different stock sectors. However, owning some large, well-established companies that pay a regular dividend can make market volatility seem less scary.
