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Dividends 101

What is a Dividend?

A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.

Dividends may be in the form of cash, stock or property. Most secure and stable companies offer dividends to their stockholders. High-growth companies rarely offer dividends because all of their profits are reinvested to help sustain higher-than-average growth.

Synopsis of Dividend Stocks

  • Companies that pay dividends are generally companies that have stable cash flows and strong balance sheets
  • Most growth companies do not pay dividends
  • Companies who pay dividends are taking cash off of their books and put the money on yours.
  • Dividends can be paid in cash, stock, or property
  • The dividends can be reinvested back into the company who paid the dividend or could be paid to you in cash for your discretion for use.
  • Living off of your dividend income is possible if your expenses are below the income coming in. It is not recommended to only have one stock for this. A diversified portfolio of stocks is more prudent.
  • The board of directors could reduce or even eliminate the companies paying of a dividend. This is a big reason to not have all of your eggs in one basket.
  • Focus on companies that have a long track record of paying and increasing their dividend pay-out.
  • Do not chase companies that offer a very high dividend yield. Often times this a disaster waiting to happen.
  • Reinvesting dividends has been a proven way to grow your assets through compound interest
  • Investing in dividend stocks is not a guarantee of investment results nor is it a guarantee that a company is good or not.

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