Before we plunge into the matter, let us first understand what a dividend is.
What is a dividend?
If the company that you have bought the stocks from has earned profits, then you as a share holder will get your profit in the form of dividends. It is up to the company’s discretion whether to reinvest the profits in the business (retained earnings) or to share the profits with the shareholders in the form of dividends or share repurchases.
Well informed investments yield great pay checks
When planning to buy stocks from a company it is very important to probe into its past, present and the future (estimated) performances. In short, you should know the entire history of the company such as its achievements, pitfalls, advantages, success rate, among others.
You should also have an understanding of the product and its presence in the present market and how it may perform in the days or years to come. Though it is hard to estimate how the company is going to perform in the future you can still have a vague picture by conducting enough research and by observing closely the experts forecasts on the company’s future performance.
You should also take into the account factors like how often the company is paying the dividends to its shareholders, how well are their stocks performing, etc.
Dividend paying stocks – Advantages
There are a lot of advantages of investing in dividend paying stocks. Some of them are:
Once you have invested in a company (of course, after proper research as mentioned above) that pays dividends to its shareholders at regular intervals, you will have passive income flowing constantly.
You can reinvest this income in buying stocks from the same company or can invest in another company. By compounding your stock with the right company you will be surprised to see the net worth of your dividends.
For example, a person who has invested in Johnson and Johnson 20 years back and has bought a 100 shares for a face value of $6,000, will now be having 1,200 shares with a net value of over $60,000, and on the top of that he/she will be receiving $1,200 ever year in the form of dividends from the company. That is 40% payout on your investment. That is how powerful compounding stocks can be with the right company.
Dividend paying stocks are the right choice for people who want to invest for longer terms. The dividends and their regular growth over a certain period of time can shoot up the face value of the stocks, thus increasing your net worth along with the increased amount of money that you can make through dividends.
It is highly suggested that when you are on the lookout for investing in a stock either in the long term or a short term, make sure that you invest in dividend paying stocks and perform a thorough research of the company in which you are intending to buy stocks.