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What Is Dividend Investing?

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  • Written By: Jim B.
  • Edited By: Melissa Wiley
  • Last Modified Date: 09 March 2014
  • Copyright Protected:
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    Conjecture Corporation
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Dividend investing takes place when investors choose stocks specifically for the purpose of gaining promised dividends from the companies underlying the stocks. Companies occasionally hand out dividends, which are extra monetary payments, to investors as a reward for their loyalty and as an enticement to other investors to put their capital into the stock. Investors take part in dividend investing because it allows them a source of income even when the stock market is struggling. This is because the dividends will generally still be paid out even when the value of the underlying stock drops.

Many people who invest money think about it in terms of the value of the stocks they buy. They seek out stocks with growth potential in the hopes that the value of the shares will eventually rise, thereby earning a profit for those who own them. The trouble with this strategy is that the stock market is generally volatile, meaning that it endures swings of momentum in both good and bad directions for investors. Dividend investing is one way in which investors can protect themselves against this volatility.

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Before undertaking dividend investing, investors should understand exactly what dividends are all about. Dividends are given out periodically to their stockholders as a kind of reward. It is important to note that dividends are not guaranteed. As a matter of fact, in times of financial struggles, a company might choose to cut out its dividends as a way of saving cash. Still, investors who find stocks that pay dividends on a consistent basis can make a tidy profit.

Another advantage of dividend investing is that it allows the potential for exponential growth of capital. When an investor receives a dividend, which is like a cash payment, she can pocket it or reinvest it in the stock, which gives her the opportunity for more dividends. In addition, there is the chance that the value of the stock will go up, which also increases the profit for the investor in the process.

To make the best of dividend investing, investors should follow a few strategies to minimize their risk and maximize their potential profit. First of all, diversification of a portfolio is important, which, in terms of dividends, means balancing out high-yield and low-yield dividend returns. The high-yield returns might seem like an obvious choice, but these are also the stocks most likely to cut dividends out in hard financial times. In addition, investors should look for companies with consistently solid cash flow, because these companies are the ones most likely to consistently offer dividends.

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