Dividends are small reoccurring payments made by large companies to their shareholders. Anyone can buy a dividend stock and start receiving passive income off of their investment.
This opens the door to a new question, why would a stock want to start paying out a dividend to their shareholders? It doesn't exactly seem like a good idea from their point of view.
Well there are actually a few different reasons why companies pay out dividends. First of all it just makes sense. When you buy a stock you are actually buying a portion of the company. If you own a share of the company, no matter how small that share may be, you still deserve to collect some of the profits that the company turns up.
It does not make a lot of sense to invest into a company unless you are going to be rewarded for it. And one way of rewarding them is by sharing income with them.
Secondly companies can take advantage of investor's greed by offering a dividend. If a stock has a nice healthy dividend it is going to also have a lot more demand in it. So by raising the dividend companies can attract more investors who will hold onto the stock for longer.
Companies realise this and raise their dividends in order to raise the demand of the stock. Higher demand means that the stock will likely increase or at least stay the same considering that supply and demand are really what drives the price of a stock.
Many companies will raise their dividends even when times are hard simply to get more investors coming in and hopefully bailing them out. Watch out for this and make sure you look for more when investing your stocks.
Now that you understand a little bit about dividends is it worth investing into it? Of course it is, however it isn't a wise idea to buy a stock simply because it offers a dividend. Look for other things as well.
This opens the door to a new question, why would a stock want to start paying out a dividend to their shareholders? It doesn't exactly seem like a good idea from their point of view.
Well there are actually a few different reasons why companies pay out dividends. First of all it just makes sense. When you buy a stock you are actually buying a portion of the company. If you own a share of the company, no matter how small that share may be, you still deserve to collect some of the profits that the company turns up.
It does not make a lot of sense to invest into a company unless you are going to be rewarded for it. And one way of rewarding them is by sharing income with them.
Secondly companies can take advantage of investor's greed by offering a dividend. If a stock has a nice healthy dividend it is going to also have a lot more demand in it. So by raising the dividend companies can attract more investors who will hold onto the stock for longer.
Companies realise this and raise their dividends in order to raise the demand of the stock. Higher demand means that the stock will likely increase or at least stay the same considering that supply and demand are really what drives the price of a stock.
Many companies will raise their dividends even when times are hard simply to get more investors coming in and hopefully bailing them out. Watch out for this and make sure you look for more when investing your stocks.
Now that you understand a little bit about dividends is it worth investing into it? Of course it is, however it isn't a wise idea to buy a stock simply because it offers a dividend. Look for other things as well.
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Inveting into dividend paying stocks can be a good idea, but only when they are backed by strong stocks.. This article, What Are Dividends? is available for free reprint.
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