There are two ways to make money with stocks: capital gains and dividends. Capital gains are what you earn when you sell stock for a higher price than you bought them, but dividends are more related to your position as a stockholder.
What are Dividends?
When you buy stock, you become a shareholder in the company. As a shareholder, you are entitled to assets of the company. A corporation may decide to share those assets in the form of dividends.
Dividends are paid out from the income of a company. A corporation can choose to reinvest their income or pay some of it to stockholders. Dividends are usually paid on a quarterly basis per share.
For example, a corporation may choose to pay its shareholders $0.50 per share. If you own 100 shares, you’ll be paid $50. If you own 2,000 shares, you’ll be paid $1,000.
Why do Corporations Pay Dividends?
Dividends are a way to share the wealth. Some stocks don’t grow as much as others because they are older and more established. These are often used as income investing stocks because investors can receive regular income in the form of dividends.
Some investors believe that dividends aren’t worth the trouble. They believe they aren’t significant for investors and that the money is better off being spent within the company for future growth.
Others argue that dividend paying stocks raise the price because investors know they will have some stability in earnings. Receiving regular dividend checks means stockholders will make money, even if the stock price is down or they aren’t selling. Also, if corporations that have regularly distributed dividends for years suddenly stop paying, the stock price could suddenly stock when people who depend on dividends start to sell.
Ultimately, dividends are a way for investors to make more money on their investments. Some people choose to reinvest their dividends to buy more stocks, and others use the dividend income to support themselves. Stockholders are owners of the company, and for many, it only seems fair that they should share in the profits at some point or another.
How to Make Money with Dividends
If you want to create regular income with dividends, the best way to do this is to buy shares of stock in companies that have historically paid regular dividends. Some brokers will allow you to have the dividends automatically reinvested, or you can have them sent to your account for withdrawal.
Another popular investment option is a dividend reinvestment program, otherwise known as a DRIP. This is a program set up with the company where you purchase stock and the dividends are automatically reinvested for you to purchase more shares. This is good for those looking to save money on trading costs and have their dividends reinvested.