What are Dividend Stocks?

A dividend stock is a type of stock that pays cash to its investors every year, simply for holding a company’s stock. In addition, a dividend stock has the capacity to increase or decrease in value. For example, the progress of a company and an increase in its profits each year gives the investor a chance to earn more income from higher-paying dividend stocks. Dividend stocks are popular with those who are new to investing and who prefer to take lower risks as opposed to aggressive risks. The more shares that an investor holds, the more the dividend stock pays.

Anyone can buy and sell dividend stocks, but this type of stock most often appeals to higher-income earners because of the supplementary or passive income it generates. A dividend stock also presents more income-making opportunities by paying cash to investors who sell their shares. Brokerage firms encourage investors to keep their dividend stocks for as long as possible because the incentive includes more cash up front based on a company’s performance as well as the sale of a dividend stock. It is possible for the extra income stream to exist as long as the company continues to do well.

Plenty of resources abound for researching, picking and checking dividend stocks. Financial-based websites and blogs provide articles to help bankers decide on a particular dividend stock. Such online references often provide updates on earnings, personal returns calculators, as well as top rankings of companies that offer dividend stock options. Other resources for decision-making include business and financial magazines, newsletters and corporate reports. Like most stocks and mutual funds, dividend stocks can be purchased through online and physical banks and brokerage firms.

A dividend stock usually is categorized according to the sector in which it is based. Among the common sectors for dividend stocks is consumer goods, which include appliances, food, personal care items, office supplies and more. The technology sector includes companies that specialize in computers, software and communications, and the healthcare field includes drug manufacturers, health insurers and medical supply companies. Consumer services, industrial products, utilities and financial businesses also are sectors where one can locate dividend stock options.

A dividend stock makes a profit based on its dividend yield, growth and price-to-earnings ratio. Investors define the yield as the return on investment, which divides the amount a company pays in yearly dividends by its average share price. The dividend growth rate analyzes how a dividend stock grows over the long term. A price-to-earnings ratio calculates a company’s share prices divided by its quarterly per-earnings share. This method helps investors assess how much the company expects to earn in dividend stocks.