When you invest in a stock, you are becoming a partial owner of that company. That means part of the profits the company makes is yours. Now you don't get a say in the day to day operation of a company and you can't just walk in and act like you own the place. You are a part owner, but the ownership profile of the company is made up of many different people. You probably own a very small percentage of the company. Together, the owners of the company vote on a board of directors. The board of directors represents the owners or stockholders of the company by putting a management in place to run the company. It is then managements job to guide the company through it's day to day operations and long term planning.
As the company makes a profit, management will decide what to do with those profits. They can retain the profits for future use, use the profits to reinvest in the company by growing and expanding or they can decide to pay out some or all of the profits to the company shareholders. When management decides to pay out profits to shareholders they do this in the form of a cash dividend.
What is a dividend? Dividends are cash payments made from a company to it's owners/shareholders. These cash payments are the shareholders portion of the profits earned by the company. Rather then keeping all of the profits to grow the company, management has decided it would be best to give some of the profits back to the company owners.
Not all companies will pay out dividends. Usually companies that are in a high growth phase will retain all of their earnings to continue growing at a fast pace. Companies that are more established and not growing as quickly, because it is hard to grow a company that is already world dominant, will pay out profits to owners. Stocks of companies that pay out dividends are known as dividend stocks.
It is a good idea to invest in dividend stocks because often times these companies are more stable, solid, industry leading companies. These are typically large blue chip companies that are great to own. In other words, these are the companies that have been doing everything right to get to be some of the best companies in the world.
Dividend stocks offer the investor a couple benefits. For one, dividend stocks tend to be less volatile then the overall stock market. When the market is going down, dividend stocks tend to go down on average less than the entire market. On the other side, dividend stocks tend to increase slower than the market as a whole but this is the trade off for investing in a stock that is typically safer. The other benefit dividend stocks provide their shareholders is money in your pocket now. Dividend stocks pay out dividend income usually every quarter. This means you get to collect a check without having to sell your shares in the company. This dividend income can be used to help offset your expenses or to reinvest and grow your overall net worth.
If you are looking at getting into investing, check out some dividend stocks. Dividend stocks are good companies to begin with because they are typically the large well known companies that you have heard of. Do the proper research on a company and invest in ones that you believe will still be strong industry leaders for many years to come.
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