What Is a Dividend?
Updated: May 5, 2020
Investopedia defines a dividend as, “the distribution of reward from a portion of the company’s earnings and is paid to a class of its shareholders.”
In short, you receive a dividend by owning stock in a company. If you own a stock that pays dividends, you will receive a portion of the company’s earnings for each individual share of the company you own. For example, if you own 100 shares in company XYZ, and they pay a dividend of $0.50 per share, then you will receive a total dividend payout of $50.00 ($0.50 x 100 Shares).
What Do I Do With My Dividends?
Well, there are a couple of options.
Most people just reinvest their dividends right back into the company through something known as a DRIP, or a Dividend Re-Investment Plan. This allows all of your dividends received to buy more shares of the exact same company.
Another option is to use dividends to buy stock into different companies. You can use the dividends from company XYZ and use it to invest in company ABC. This allows people to invest and diversify their portfolio a little more without having to sell any shares or put in additional capital.
(Disclaimer: Ticker Symbols used should not be taken as investment advice)
The last option is to just take the dividends in cash and use them to pay living expenses. This is the option most retirees take. First off, they do not have to sell any shares because the dividends are sent out in cash. This is extremely important for those attempting to keep a diversified portfolio throughout retirement without having to buy and sell shares constantly. Also, dividends are often distributed monthly, quarterly, or annually, so it is a great source of recurring revenue for retirees.
Where To Go From Here
The versatility of dividends allows investors to use them as a re-investment option or as a source of income. Either way, knowing what dividends are and how exactly they work can help you to become a better investor in the future.
Disclaimer: I am not a financial advisor, so please review all of this advice with your CFP or financial advisor first.