There are definately a lot of excellent stocks paying dividends out there that give their shareholders the ability to earn a small income off of their money. But what exactly are they?
Basically a dividend is a way for the company to share their earnings with their stock holders. If the company is profitable they may distribute a percentage of their earnings to their shareholders in the form of a dividend.
These dividends are distributed to an investor based on how many shares of stock that investor holds. For instance if the company is distributing $1 million dollars of earnings and there are $10 million shares then each investor gets $.10 for every 1 share that they own. This keeps the investors happy and hopefully it will also help to get some new investors to come and invest in the company.
It could also show that the company is strong because if they have extra money to pay out some dividends they must be doing something right. However, just because a company pays out a dividend does not mean it is a good investments.
There may be a serious flaw in the companies business plan. Some companies that are not very good investments pay out a dividend in order to get new investors to come in and save the company from having to declaire bankruptcy.
So, if all you do is go out and get a list of stocks paying dividends and buy them all, then chances are you will get into a few of these terrible companies. No matter how strong the dividend is will become utterly worthless if the stock goes to $0 in the next 6 months.
Simply by checking out some fundamental factors of the company such as the PE Ratio you can increase the odds of getting into a company whose stock is likely to go up in the future and you are not relying completly on the dividends to make a good return.
So, while dividends work great as an added bonus, they should not be the only reason for getting into a company.
Tags: buying dividend stocks, dividend investing, what are dividends