If you start talking about dividend investing at your next cocktail event, it’s possible that other patrons may not see you as the life of the party.
But that’s okay – because while dividends are not necessarily sexy, they are a foolproof way to reel in consistent, predictable returns in the market. And for decades, seasoned investors have leaned on dividends to help power their portfolios through both good and bad times in the market.
What is a Dividend?
When a company earns a profit, it essentially has two options.
1. Re-invest in the business
This is the option chosen by many high-growth companies. They pay down debt, or expand their operations to make more profit in the future.
2. Issue a dividend to shareholders
A dividend is a share of after-tax profit of a company, distributed to its shareholders according to the number and class of shares held by them.
How and when is a dividend issued?
- Both the amount and timing of dividends is determined by the Board of Directors
- Usually for public companies, dividends happen on a quarterly or annual basis
- Most dividends are declared by large and established “blue chip” companies (i.e. P&G, McDonald’s)
- Dividends are often paid if a company is unable to reinvest its cash at a higher rate than shareholders
Most importantly for investors, dividends from good companies should be predictable and sustainable. Some companies like Coca-Cola have been paying out uninterrupted dividends on common stock for over a century.