Ever wonder what a dividend was? Well here at Stock Trading 101 we are all about stock market education, and a stock dividend is another term we will be adding to the list. Earlier this week I covered capital gains tax, which was a great read! This article will explore dividends, what they are, why companies pay them, and why some investors like them in easy to understand stock lingo.
What is a dividend?
Like all of our terms, I like to start out with the definition from my personal favorite financial education site, Investopedia.com. Investopedia says a dividend is the “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 (i.e. dividends per share or DPS). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.”
That is broken down pretty darn well, and really the key words to be taken from this are Distribution, Earnings, Shareholders. A dividend is simply the distribution of a company’s earnings to its shareholders.
Why Companies Pay Dividends. The Benefits.
The reason why some companies pay dividends is to simply give more value to their shareholders who own pieces of the company. It really can be described as the company handing you a check and going, “thanks for supporting us, have a nice day!”
When companies have tons of cash sitting around, paying dividends are an attractive option to consider. By them paying you money for holding those shares (or a piece of the company), it not only intices you to keep holding those shares, but also buy more.
Some investors may only buy stocks that pay dividends. For this reason dividends also attract in new and possibly more investors than a company that has no dividend. People think, “Why buy 100 shares of stock XYZ when I can buy shares of ABC and also get paid for owning those shares.”
If you haven’t figured out already, not all companies pay dividends, so you have to search to find companies that do pay them.
Dividend yield, a further understanding
From the investopedia definition, you probably noticed the term “dividend yield”. This is a term that simply means what the dividend is paying, expressed as a percent of the stock price. Let’s take Microsoft (MSFT) for example, and if you pull up its statistics on yahoo finance, you can see at the bottom right it says dividend yield: 1.40%. This means that Microsoft is paying 1.4% of every share of stock it owns in cash back out as a dividend to its shareholders. If you take 1.4% and multiply it by the stock price which in this case is about $28.50, you’ll come out with $.40. So what does that mean? That means that for every one share of Microsoft stock you own, Microsoft will pay you $.40 extra over the course of the year just for owning the stock. So, if you owned 100 shares of Microsoft for a year, you would get inna sense a check written to you by Microsoft for $40 (or 40 cents x 100) for owning the stock that year, cool!
Closing Notes
I don’t want to get to far into the complexities of dividends here because keeping it simple it better than getting everyone confused. With the brief explanation above I hope you can have a basic understanding for what a dividend is, why companies pay them, and how to figure out what value it holds to you. Dividends in the end used as an extra perk to get you to hold shares of a companies stock over someone else’s. They also serve as an added reason to buy the stock in the first place, and can serve to attract investors that want to own a dividend paying stock over a non dividend paying stock.
To learn more about dividends, feel free to get in touch with me and I will be happy to help you out. If you enjoyed this post and are thinking to yourself, “wow, this actually makes sense!” than it is a good time to subscribe to the blog! 
If you enjoyed this post, make sure to subscribe to the feed!
Related Posts:
- Lowes (LOW) Stock Nears Resistance
- 7 Investment Ideas For The Sinful Investor
- Oil and Ford
- Understanding Market Capitalization
- Hosting the Carnival Of Personal Finance and #118 Highlights
Filed Under Stock Market Education |
Subscribe to the Blog
|
Recieve Blog Updates by Email!
----------------------------------------
Share Your Knowledge »