Companies make profits and have a few choices as to what to do with the money:
- Maintain the money in retained earnings
- Look to acquire other companies or expand operations
- Buy back stock
- Pay dividends to the shareholders
A dividend is a payment made by a corporation to its shareholders, with each share receiving an equal amount of value. Dividends can be paid as additional shares of stock but most are paid as regular cash dividends, paid at predictable intervals- usually once every three months in the United States. Some companies do pay dividends annually, semi-annually or every month.
Each company sets its own payout schedule and determines the dividend dates on which the dividends will be made. Some companies even pay a special dividend (one time) every so often and are not part of the regular dividend schedule.
Companies can change their dividend policies at any time, but we look for companies that increase their dividend payments over time.
So if a company is paying a 3% annual dividend over the course of one year, the company is essentially saying if you buy my stock, I will more than likely pay you a present of dividend payments as gratitude.
So why buy a stock that does not pay a dividend when you can buy a company that has a history of rewarding their investors with regular cash payments. This also reduces the overall risk characteristics of a portfolio when adding mature stable companies that pay such dividends.
The most exciting part is when you reinvest your paid dividends to purchase more shares; you will start to see your portfolio grow at a much quicker pace.
Companies have been paying dividends for over 400 years. The first company to pay a dividend was the Dutch East India Company in the early 1600s. Dividends have accounted for over 40% of the S&P 500’s total returns since 1929.