What Dividends Are and When They're Issued
If you've ever owned stocks or held certain other types of
investments, you might already be familiar with the concept of
dividends. Even those people who have made investments that paid
dividends may still be a little confused as to exactly what
dividends are, however... after all, just because a person has
received a dividend payment doesn't mean that they fully
appreciate where the payment is coming from and what its purpose
is.
If you have ever found yourself wondering exactly what dividends
are and why they're issued, then the information below might
just be what you've been looking for.
Defining the Dividend
Dividends are payments made by companies to their stockholders
in order to share a portion of the profits from a particular
quarter or year. The amount that any particular stockholder
receives is dependent upon how many shares of stock they own and
how much the total amount being divided up among the
stockholders amounts to. This means that after a particularly
profitable quarter a company might set aside a lump sum to be
divided up amongst all of their stockholders, though each
individual share might be worth only a very small amount
potentially fractions of a cent, depending upon the total number
of shares issued and the total amount being divided. Individuals
who own large amounts of stock receive much more from the
dividends than those who own only a little, but the total
per-share amount is usually the same.
When Dividends Are Paid
How often dividends are paid can vary from one company to the
next, but in general they are paid whenever the company reports
a profit. Since most companies are required to report their
profits or losses quarterly, this means that most of them have
the potential to pay dividends up to four times each year. Some
companies pay dividends more often than this, however, and
others may pay only once per year. The more time there is
between dividend payments can indicate financial and profit
problems within a company, but if the company simply chooses to
pay all of their dividends at once it may also lead to higher
per-share payments on those dividends.
Why Dividends Are Paid
Dividends are paid by companies as a method of sharing their
profitable times with the stockholders that have faith in the
company, as well as a way of luring other investors into
purchasing stock in the company that is paying the dividends.
The more a particular company pays in dividend payments, the
more likely it is to sell additional common stock... after all,
if the company is well-known for high dividend payments then
more people will want to get in on the action. This can actually
lead to increases in stock price and additional profit for the
company which can result in even more dividend payments.
Getting the Most Out of Your Dividends
In order to get the most out of the dividends that you receive
on your investments, it is generally recommended that you
reinvest the dividends into the companies that pay them. While
this may seem as though you're simply giving them their money
back, you're receiving additional shares of the company's stock
in exchange for the dividend. This will increase future dividend
payments (since they're based upon how much stock that you own),
and can set you up to make a lot more money than the actual
dividend payment was for since increases in stock prices will
affect the newly-purchased stock as well.
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