Dividends - How Stocks Pay You Back

Dividends are a portion of a company's profits that it distributes to its shareholders.

Here's how they work

When you invest in a company's stock, you're essentially becoming a part-owner of that company. So, if the company does well and makes money, they might decide to share some of those earnings with their owners, which is you! These shared earnings are called dividends.

Dividends are typically paid out on a regular basis, often quarterly, and are usually calculated based on the number of shares you own. The more shares you have, the bigger your slice of the dividend pie.

Receiving dividends can be a great way to earn extra income from your investments, plus, they can help your money grow over time through a process called compounding. You can choose to take your dividends in cash, or you can reinvest them to buy more shares and potentially increase your ownership in the company. Dividends can also be a nice cushion during market downturns when stock prices may be less stable.

It's important, as a new investor, to balance dividend investing with other strategies, as not all companies pay dividends, and even if they do, the amount can change over time. Newer or rapidly growing companies may choose not to pay dividends, but to reinvest all profits back into growing the business. So, when choosing your investments, diversifying your portfolio with a mix of dividend-paying stocks, growth stocks, and other assets can help you achieve a well-rounded and resilient investment strategy.

Be mindful of the tax implications from this additional dividend income and have a well-thought-out investment strategy which is aligned with your financial goals. With these things in mind, dividends can be that extra sweetness in your financial pie.

Today’s Takeaway:

Companies with a consistent history of paying dividends are often a sign of financial strength and stability. These companies tend to have reliable cash flows and are committed to rewarding their shareholders.

But be selective! There are financially unstable companies offering huge dividends to entice new investors, but these gimmicks don’t last and could lead to losses in the longer term. 

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The content of this newsletter is strictly for educational purposes and does not amount to professional advice. It's not a substitute for independent financial advice from a professional who can advise on your circumstances and individual situation.