Investing in Dividend Paying Stocks

By Stock Research Pro • April 21st, 2011

Dividend paying stocks can be a good investment choice for investors who are looking for income from their stock investments. As you may know, dividends are payments that companies make to their shareholders out of the profits the company has earned. Many investors believe that when a company pays a dividend it gives the marketplace an indication that it is financially healthy.

Some Advantages of Dividend Investing

For investors, owning stocks that pay dividends can provide some significant benefits, including:

  • Passive income- Dividends payments provide a passive income stream in that, once the investor takes ownership of the stocks, they do not need to do anything but collect the dividend payments.
  • Relative stability- Dividend paying stocks have historically shown more price stability during turbulent economic times. Many investors see dividend stocks as particularly attractive during bear markets. Because of their relative safety and stability, dividend stocks are often seen as good choices as the investor nears retirement.
  • Potential for capital appreciation- Dividend stocks offer investors two potential ways to make money. The first is through the receipt of regular dividend payments, the second is in the potential for capital gains through a stock price increase.

  • How are Dividends Paid?

    Shareholders may be paid dividends in cash from the company’s profits or in the form of additional shares. The company’s policies determine the method and timing of dividend payments, but they can be generally divided by:

  • Preferred stock- Preferred stock is a special type of stock in that guarantees dividend payments to the holders of that stock before any common stock holders receive their dividend payments. The company’s board of directors will usually set the terms regarding preferred stock dividend payments and typically these payments are cumulative (meaning that if the company fails to make a dividend payment, it must satisfy the short-fall when business conditions improve).
  • Common stock- Common stock shareholders are paid only after the company has satisfied its obligations to creditors and preferred shareholders.
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    The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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