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Basics of Dividend Investing

Updated on May 26, 2012

There are many situations that investors have to take into consideration while investing. Things like capital gains, income, and growth are primarily the factors in what investors use to determining the right steps to take in their portfolio and diversification. This is the same for dividend income paying stocks and should be considered before investing in any stock.

Basics of dividends:

The easiest explanation of a dividend stock is that when a company has a profit for the quarter. They take a certain percentage of that profit and distribute it across the spectrum in the form of payments to their shareholders. The type of companies that have dividends are going to be companies that have grown quite a bit and that are profitable enough to pay out dividends. Rarely will you see a company paying out dividends that has just started.

1. One advantage to dividend paying stocks is the usually in falling or rising markets they still tend to pay dividends. So, where other companies are losing value on the stock and losing money the dividend stocks are still paying out. These strong blue chips companies that have been paying them for years still bring more comfort to investors that invest in them because they still continue to pay quite a bit.

2. Dividend paying stocks are a great retirement vehicle for those looking for a steady flow of income in that stage of life. The amount you invest in these dividend paying stocks, mutual funds, or bonds is usually well preserved and you get the interest paid to you on a quarterly or annual basis. They are also considered a primary source against the ravages of inflation.

3. As people invest in dividend stocks they typically take the gains of the dividends for the first few years and continue to reinvest them regularly. This provides amble opportunity to keep adding additional shares that will be able to provide additional income in a future scenario. The long term approach for these gains is clearly reinvesting the dividends until a time when they are needed.

Over all dividends are a great way for new investors to start investing and a way for them to save for retirement. Others will purchase shares to have a steady income every month or quarter. But, no matter what your reasoning always do your research before investing in any stock and if you need to check with a financial advisor before you do.


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