There are two ways to make money with stocks: selling your shares and dividends. Most people are pretty familiar with the selling bit, but what about dividends? What are dividend stocks? How do they work, and how do they make you money?
What are Dividend Stocks?
Dividend stocks are stocks that – you guessed it – pay out dividends. Dividends are payments made to shareholders, and they’re usually paid out on a quarterly (every three months) basis.
Basically, they’re free money that you get just for holding shares in a company.
Not every company offers dividends. Usually, it’s only well-established, older companies that pay them. They’re not guaranteed either. A company can stop paying dividends anytime it wants.
There are no set-in-stone rules for how much a company pays in dividends. Just look at a few of the high-dividend stocks out there:
- National Health Investors Inc. (NHI) pays a dividend of $1.10/share with a dividend yield of 6.65%
- International Business Machines Corp. (IBM) pays a dividend of $1.63/share with a dividend yield of 5.58%
Along with quarterly dividends, companies may also give out a special dividend if they have a really great quarter. Think of these as one-time bonus payments on top of the regular dividend.
Dividends are a sign of a company’s financial health, and they’re often used to attract investors.
Basically, these companies are saying: “We made so much money, we’re giving it away.” And it’s a tactic that works. Savvy investors look for dividend stocks because it’s just a smart way to grow your wealth.
Why Should You Invest in Them?
The answer should be pretty obvious: you get paid just for holding shares in a company. And those payments come regularly (every three months or so).
Dividend stocks provide a steady stream of income, but they can also help you grow your money more quickly if you’re smart about using them.
How to Use Your Dividends
You can use your dividends however you want, but if you want to grow your money as fast as possible, it’s better to reinvest them. When you reinvest your dividends, your wealth snowballs.
One way to do this is through a dividend reinvestment plan or DRIP. It’s a stupid-simple way to automatically reinvest those payments and make your money work for you.
When you use your dividends to reinvest, you gain more shares. The more shares you own, the greater your dividend payments will be in the future.
You can also use your dividends in other ways:
- Spend them. It’s free cash you can use to supplement your income.
- Save them. Sock them away for a rainy day.
- Invest them in other stocks.
Dividend stocks are a simple, practical way to grow your wealth or just enjoy a steady stream of income.