There are two methods to making money with stocks. The first method is the one most of us are familiar with—buy a stock at a low price then sell it at a higher price. It’s called price appreciation (A simple concept that’s much harder to execute in practice by the way).
Method number two is when a company earns a profit and decides to share that profit with stockholders. These profit allocations are called dividend payments. Dividends are a set dollar amount (or fractions of a dollar) paid out on a per share basis. When you have 50 shares, a 25 cent/share dividend may not seem like much (0.25 x 50 = $12.50—woo hoo!). But what if you had 100,000 shares? A same 25 cent dividend would net you $25,000. Nice!
The folks over at Moolanomy summed up this process nicely.
Dividends are basically a way of sharing the profits. Companies take a portion of their profits and give it to their shareholders. Corporations know that this will keep their shareholders happy, helping to retain them and keep them invested in their company.
Besides getting a happy face every three months, what are some other advantages to dividend investing? Is it for everyone?
Companies that pay high dividends are favorites among investors who are interested in income investing, like retirees. Individuals who like to see consistent income coming from their shares to use for monthly expenses like the consistency and would rather see monthly dividends instead of selling stock when they need cash.
My grandma “sort of” does this. I write “sort of” because she actually invested in natural gas properties years ago. Depending on how much gas the producer takes out of the ground on each property, my grandma gets a dividend check. She also gets paid on a quarterly basis. But since she has quite a few properties, she’s never failed to get a check every…single…month for the last 25 years. Not too bad for dividend investing.
The other advantage to dividend investing…
…is the ability to reinvest dividends. Reinvesting dividends means you are taking the dividend payments and using them to buy more shares in the company. By reinvesting the dividends you make, you can buy more shares allowing you to earn more dividends.
You can invest directly in dividend paying companies using a DRiP account. You setup an account directly with the company. I actually did this with Home Depot and Caterpillar years ago. Unfortunately, I didn’t stick with it.
Read more at Moolanomy.com