What Are Dividends?
The stock market is full of many nice stocks paying dividends out there which can give their shareholders the ability to get an extra little cash flow from the investment that they hold. But what are dividends and why do companies pay them out?
Basically a dividend is a way for the company to share their earnings with their stock holders. If the company is making money they can choose to distribute a portion of their earnings to their shareholders inthe form of dividends.
These dividends are distributed to an investor based on how many shares of stock that investor holds. For instance if the company is distributing $1 million dollars of earnings and there are $10 million shares then each investor gets $.10 for every 1 share that they own. This keeps the investors happy and hopefully helps to get new investors to put money into the company.
It could also show that the company is strong because if they have extra money to pay out some dividends they must be doing something right. However, it could also signal that the company is in trouble and wants to get new investors fast.
There may also be a problem with the company. Some companies that are not very good investments pay out a dividend in order to get new investors to come in and save the company from having to declaire bankruptcy.
So, if all you do is go out and get a list of dividend paying stocks and buy every last one, then you will probably get into some very bad investments. No matter how much the company is paying in dividends is will be useless if the stock goes out of business in the next 6 months.
By looking at many different fundamental factors and ratios such as the PE Ratio you can increase your chances of getting into companies whose stock will likely appreciate in the future and you are not relying totally on the dividends it is producing.
While dividends can be a fantastic way to get an added bonus on your investment, they are not the only reason to invest in the stock market.
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