A dividend is a distribution of a company’s profits to shareholders of their stock. Dividend payments are a means of rewarding investors for their ownership in the company.
If you own shares of ABC Company stock and ABC Company makes a profit the board of directors of the company may decide to issue those profits back to you. The decision for a company to pay a dividend is generally based on the company’s financial results from the previous quarter. Most of the time dividends are paid out as cash, however a company may decide to make the dividend payment in the form of additional stock to investors.
Do all companies issue dividends?
No. For example; start-up companies and companies in high growth industries like technology or bio-tech may choose not to issue dividends. In this scenario the company may choose to keep the profits and reinvest them back into the company to spur expansion and growth. The assumption being that as they reinvest the dividends (profits) and grow the company, the growth will result in higher sales and inevitably a higher stock price.
A dividend is one way to make money from the ownership of a stock. Dividends are typically expressed as a percentage in relationship to a company’s stock price. The percentage is referred to as the dividend yield.
Let’s take a look at Walmart and their dividend yield. (The example below is the stock summary from Yahoo Finance at the time of this writing 5/16/2017).
The dividend for Walmart (circled in red) is $2.04. $2.04 is what the annual dividend payment is for a Walmart stockholder. 2.68% is the yield based on the current stock price, calculated as $2.04 (the dividend) / $75.71 (the stock price). If you own Walmart stock you could expect this dividend to be paid out quarterly at a rate of $.51 per share per quarter ($2.04/4).
A stocks dividend and yield are an important element if you’re looking to invest in stocks. The yield is one method of evaluating how successful a stock is – the higher the yield the better.
A simple strategy when investing in stocks is called a Dividend Investment Strategy. In its simplest form, a dividend investment strategy determines that you invest in stocks that only pay a dividend – the higher the better. The assumption being that if you invest in stable companies with consistent and profitable growth you will make your money from the dividends paid versus growth in a stocks price.
Keep in perspective that the board of directors make the decision whether to pay shareholders a dividend or not. Dividends are not guaranteed. A company may choose to pay dividends one quarter, but not the next, based on the financial health or strategy of the company.
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