What are dividends? Understanding dividends, how they work, and why they're important.

OKAY! A common question folks have when they first begin investing/trading in the stock market is "what's a dividend and dividend yield?" In short, it's a company's way of saying "thanks for being a shareholder/investor in our company" and they hand over a percentage of their profit for every share you own of the company that is paying out the dividend. 

Who pays out a dividend?

Keep in mind, not all companies pay a dividend, as some companies may have all their revenues go back into the company or find themselves unprofitable. Tesla is a phenomenal example of a company that places their revenues back into the company and is currently unprofitable. Therefore, can't afford to give a dividend to their shareholders.

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In the case of Apple, a highly profitable company that pulls in revenues in the billions of dollars every year and has some $200 bn in cash, can afford to give a dividend to it's shareholders. 

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What the percentage and the price means

The price right next to the dividend is the estimated income you'll receive by the end of the year per every share you own. So, if you own 10 shares of Apple, you can expect to yield $2.52 per every share you own by the end of the year or $25.20 in total. (10 X 2.52 = $25.20) Oops, did I say "estimated" and "expect?" Yup, companies aren't obligated to pay out a dividend every month, quarter, semi-annually, or annually. They can stop at any given moment. Majority of the time, the company pays out the dividend since it's in the company's best interest to do so, as some shareholders might sell off their shares and leave for another company that pays the same or a higher dividend. The percentage is the dividend divided by the current share price. Apple is trading at $155.30 per share and is paying a dividend of $2.52 ((2.52/155.30) X 100 = 1.62%) thus giving you the cute percentage to the side. 

So why don't I invest in companies that pay a dividend of 10% and start packing to Hawaii today?

While it's fun to imagine throwing your cash in a company that pays out a 10% every year and just live off of that, you must remember, that a dividend is a part of a companies profits, if a company were to hit hard times and can't make ends meet, then they'll most likely not pay their shareholders and use said cash on their business to stand back up. Sometimes, the company might have enough cash to pay their shareholders, leaving little cash for the company to reinvest in themselves, which in turn, could affect profits in the future causing their share price to go down, as well as their dividend yield. 

So, when do I get paid? 

Upon purchasing shares of a company, you will realize that there will be a small section that says "ex-dividend date" or the last day you can purchase shares of a company to qualify for the dividend. You'll also find a section that says "dividend payable date" or the date you should receive your dividend payment. They're USUALLY paid out every quarter or 3 months. 

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What's the point of even being invested in companies that pay out a dividend if I only get paid cents every quarter? 

Make no mistake, at first it can be discouraging to get paid a few cents for every share, every quarter. But if you think about the long term gains over time and buy back shares of the same company in the long haul, you can significantly have a huge boost in your overall net worth. After all, your dividend check every quarter is determined by the number of shares you own, the more shares you repurchase, the bigger your dividend check becomes over time. 

DRIP or Dividend Reinvestment Plan/Program

Your brokerage can offer DRIP, a plan that automatically reinvests your dividends on the dividend payout date, at no extra cost, you evade brokerage fees entirely, saving you anywhere between $5 - $10 for every trade you would have made had you reinvest the dividends yourself. Or, you can cash out on the dividend and spend it however you would like. My suggestion is to reinvest the dividend back into the company. 

Conclusion  

Dividends make a GREAT stream of passive income and are useful to grow your wealth in a faster manner.