Stock dividends are a tried and true investment strategy for many people. They are a great source of passive income that can reward you for many years to come for your disciplined approach to investing. Considered to be a standard part of any investment portfolio, they are the number one way to start, maintain and increase your passive income for the rest of your life.
Let’s talk for a minute about what a stock dividend is. Public companies have all sorts of good and bad qualities that may be important to think about when you are evaluating whether or not to buy them. There are fast growing companies, start ups, companies in all sorts of different categories like technology, autos, pharmaceuticals, etc. but companies that pay a quarterly dividend year after year have one thing in common. They have free cash flow and they have committed to paying part of their profits to their owners (you the stock owner). Dividends come from new earnings of a company and its operational success and are paid to the owners every quarter in the form of a declared dividend.
How Much is the Dividend?
When you look at a stock you can see in the summary lots of information about the company. How big it is by market capitalization, how many shares are outstanding, what its sales are, and much more. When you look at the dividend part you will see two numbers. The dividend as a percentage of the stock price (this changes daily because the stock price changes daily), and the actual amount being paid per quarter.
So for example Ford Motor Company pays around 5% per year in dividends, or about 1.25% per quarter. That percentage is based on the stock price so the percentage can go up and down even though the amount is 60 cents per year per share. That means that every quarter they will pay you 15 cents for each share that you own. If you look at the largest companies on Wall Street you will see many companies that pay dividends. Sometimes the dividend is a lot and sometimes it’s a little. Many times it’s nothing.
Dividends have other benefits
If you are investing for your financial future and don’t need the income that dividends offer every quarter, there is another powerful benefit to dividend stocks and that is reinvesting. If you take your dividend income each quarter and reinvest it in more stock, you can compound your investment and have more dividend stocks. There are two easy ways to do this. First is to sign up for automatic reinvestment in your investment account so that the income is automatically reinvested into stocks that you have picked. The other way is to do exactly the same thing in your IRA. The benefit of the IRA is that the earnings are tax free as they grow in your IRA account. Both types often have lower or no fees for buying the additional stock from your dividend income which is a good thing because you are often only buying a few shares each quarter.
There are lots of resources about dividend stocks and how to buy them, and what to buy, depending on what criteria are important to you, but I can tell you from personal experience that I have a diversified portfolio of dividend stocks so that I am not completely dependent on the earnings of one company. However you go about it please know that dividend stocks can be a powerful part of anyone who is looking to generate a new source of recurring income.