What is a Dividend?
When you buy a common stock, you are buying a share or percentage of a company. You are part owner of the company, which usually entitles you to vote for the directors who run the company, and share in the fortunes of the company’s business.
Hopefully, you have done your research and have bought a company that makes profits from its product or services. After the company pays taxes on its’ profits it can retain the earnings to invest for future growth and/or distribute the earnings to the owners/shareholders of the company. The part the company chooses to distribute to shareholders in called a dividend.
As an owner of a stock you have two ways of making money. Capital Gains (or losses) are the difference between what you paid for the stock and what you sell it for. You don’t receive the appreciation or growth from the stock until you sell it. Dividends are paid to you while you own the stock. You can use these dividends for income, or better yet, reinvest your dividends and build wealth through dividend growth compounding.
Recommended Reading:
Five Benefits of Always Reinvesting Dividends
| AAAMP Blog by Ken Faulkenberry | |
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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