If you are new to investments, you may or may not know what dividends are. Hopefully you understand what a stock is and how it makes money. It is simply a piece of a company that you can own. Let’s say a company has 1,000,000 shares of stock that cost $10 each. You can purchase 10 shares for $100 dollars.
How do you make money from stocks?
Over time, the value of these shares of stock may increase or decrease. This is based on the supply and demand principle of economics. As more people want to buy stock from a particular company, the price of that stock increases. The reverse happens when more people are selling their shares, the price goes down.
Where do dividends fit into all of this?
When a corporation is doing well, they may decide to pay dividends. This is a payment to their shareholders separate from stock increases. The increase from their stock doesn’t come from the corporation, but the dividends do.
The amount of dividends depends on the corporation’s net income and how much they are willing to pay. It could be anywhere from $.25 to $1 or more per share. So, if you have 100 shares of stock of a company and they decide to issue $.50 per share in dividends, you will make an extra $50. This is usually done on a quarterly basis.
Should you search for dividend paying stock?
Some companies almost always pay dividends. These stocks are popular among retirees because it is another source of income. Whether or not you look for dividend paying stock is entirely up to you.
I wouldn’t suggest you buy stock only based the fact that they pay dividends. You should conduct proper research of any company you are willing to buy stock in and there is no problem making dividends one of your criteria.
Of course, if you are young, you have more time and can take more risk. Many of the younger companies don’t pay dividends because they are still becoming established, but they might give you a much higher return.