Dividends are small reoccurring payments made by large companies to their shareholders. Anyone can buy a dividend stock and start receiving passive income off of their investment.
But why exactly would a company want to start paying out a dividend? It seems like they are getting the short end of the stick. Would you want to pay someone money every month or quarter.
There are a few different reasons why companies pay out a dividend. The first reason being, that it is only fair to reward investors. When you buy a stock you are basically buying a portion of the company. As a partial owner of the company you should make money as the company itself makes money.
It wouldn’t make sense if you invested into a business and did not benefit when it made money. So you should benefit if you invest into the company’s stock and they made money.
A second reason companies pay out a dividend is to keep interest in their stock. Investors like to get paid just for owning a security. Why wouldn’t they it is free money after all? So by offering a dividend companies can actually attract more investors.
Companies realise this and raise their dividends in order to raise the demand of the stock. Higher demand means that the stock will likely increase or at least stay the same considering that supply and demand are really what drives the price of a stock.
Some companies will even raise their dividends when they are in times of hardship just to get more investors to buy stock in the company. So, watch out if your plan is to invest simply for the dividends.
Now that you understand a little bit about dividends is it worth investing into it? Of course it is, however it isn’t a wise idea to buy a stock simply because it offers a dividend. Look for other things as well.
