What Is Dividend Investing and How Does It Work?

What is a dividend?

A good company is recognised by its profits and when it earns profits, it has three options to go with: Firstly, it can extend or power up its business; Secondly, it can issue dividends to its shareholders; Lastly, it can buy shares of its own company from the open market just to ensure its majority shares are in the company.

 Dividends are income for the shareholders which are issued to them by the company earnings as per their share. Dividends are not guaranteed payments. These are issued with the allowance of the Board of Directors of the company. They decide whether they would issue dividends or not.  A dividend is mainly issued in quarterly, half yearly or on an annual basis and are always quoted in terms of cash amounts. However, sometimes it may also be quoted in terms of some percent of the current market price of the shares in the open market.

Types of Dividends

 While purchasing shares of a company, we expect the market value of the share would increase but we also expect some extra income from these shares which is also known as dividends.

The company can give dividends in four different ways which are as follows:

Cash Dividend –  It is the most popular way of distributing the dividend. They are paid on the basis of cash to the shareholders on the date of declaration of the dividend.

 Stock Dividend or Bonus   Share –  The company issues some extra shares to the existing shareholders just to make them happy. These shares are known as Bonus shares.

 Scrip Dividends –The maturity period of scrip dividend is very short. The dividends which the company issues to its shareholders doesn’t bear any interest.

 Bond Dividends –  These are mostly similar to scrip dividends. Just the difference is that their maturity period is longer and the dividends issued to the shareholders bears interest in it.

Why do people invest in dividend stocks?

In spite of the fact that dividends are not guaranteed payments, many investors are dependent on them as a source of earnings. The dividend yield of these stocks gives higher profits as compared to the interest rates. The dividend stocks allow retirees to set a schedule to receive dividend every month. The investors who want to invest for a longer period could reinvest these dividends to buy more shares, as greater the number of shares, the greater is the dividend pay-out.

Why do companies pay the dividend?

Companies pay dividends as they are major signs of financial conditions of a company. They pay dividends to magnetize investors to invest in their company and to increase the market value of the share price of the company. The company that needs fewer capital reinvestments will start to issue higher dividends. If a company earns higher profits, then they could share these profits with their shareholders by providing them with the dividends.

Why don’t companies pay dividend?

A new start-up company needs to put all its profit in the capital as it highly needs more and more capital to succeed in future.  These companies need capital funds for their sustainable growth and development. Some mature companies also skip dividends so as to pay some costs and expenses or to keep this funds as a reserve for future risks.

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