Dividend payments are a way for publicly traded companies to attract and retain investors by distributing a portion of profits to shareholders. The amount and timing of payments are decided by the board of directors, and investors can earn a return through current income and evidence of company stability. Diversified investments can be made through mutual funds and ETFs.
A dividend payment is an incentive offered by a publicly traded company to attract and retain investors. Corporations pay dividends to shareholders in exchange for an investment of capital through the purchase of shares. Dividends are generally paid in cash at regular intervals. Dividends are a portion of the company’s profits paid to shareholders instead of reinvesting the capital for the growth of the company.
The corporate board of directors decides the amount of a dividend payment and the timing of the payments. Corporate profits are distributed at the discretion of the board of directors. Part of the capital can be retained for business purposes, while the rest is paid out to shareholders, usually in the form of cash, but sometimes as additional shares. Some corporations offer a dividend reinvestment plan that applies the cash dividend toward the purchase of more shares. A company can increase or decrease its dividend payout if the business climate changes.
Speculating in stocks that periodically provide a dividend payment will ensure that investors receive a return. Dividend-paying stocks are typically purchased for an established company that is profitable and has established and free cash flow. Excess cash can be reinvested for growth and expansion, or it can be paid out to investors as dividends.
Dividends are generally paid monthly or quarterly, with some special dividends paid annually. The dividend yield is a financial ratio that calculates the annual payments relative to the share price. The result is the return on investment for every dollar invested in the company. Dividend yield is a way of comparing different companies that pay dividends.
Investors are drawn to dividend-paying companies for two reasons. The first is the current income provided by dividends. The second is that dividends provide evidence of the stability of the company. An investor who receives a periodic dividend payment is assured that the invested capital is in good hands.
Investing in growth stocks is an alternative form of speculation. Growth stocks generally do not pay dividends, reinvesting excess cash flow in research, development, expansion, or general types of company growth. The investor can earn a return on investment only through the capital appreciation of the stock value.
Diversified investments in dividend-paying stocks can be made through mutual funds and exchange-traded funds (ETFs). Both financial products offer investments focused on current income. The advantage of this type of investment is risk mitigation. Dividend payments by mutual funds are known as distributions. ETF dividend payments vary, but most are paid quarterly.
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