What is a dividend?
Dividends are payments made by a company to its shareholders. While some companies pay no dividends, some pay a portion of their earnings back to shareholders on a monthly, quarterly or yearly basis. One-time special dividends are also possible. When a dividend is payed, the money shows up as cash right in your investing account.
Why do some companies pay a dividend and some don't?
Companies that pay no dividends are usually companies that are still growing. These companies retain all of their profits so that the money can be used to grow the business (eg. make acquisitions). Therefore, companies that DO pay a dividend tend to be large, stable companies that feel that giving money back to the shareholders is the best thing to do with it.
For every share you own, you are paid a portion of the company's earnings.
Reitmans (Nov 2011)
Share Price: $15.44
Dividend: $0.20 quarterly ($0.80 annually)
Yield: $0.80/$15.44 = 5.2%
So if you own one share of Reitmans, every 3 months they will send you $0.20. Now that may not sound like much, but if you had $1,000,000 invested in a portfolio of dividend paying stocks paying on average 5% annually, that would be $50,000 per year from dividends alone. We also of course hoping that the share prices is increasing over time as well.
What is dividend investing?
Dividend investing means investing in stocks (or ETFs) that payout dividends. Dividend investors take comfort in the fact that despite fluctuation in the share price, the dividends keep flowing in. Typically, dividend investors look to dividend growth stocks...companies that are growing their dividend year over year. This is because there is a trend that as a dividend increases, so does share price.
Dividends are not guaranteed...a company can reduce the dividend, temporarily suspend it, or eliminate it altogether. This can and does happen. That said, there are many companies out there that have payed uninterrupted dividends for 30, 40 or 50 years or more as well. For example, the Bank of Montreal has payed out dividends for the last 182 years.
Further Related Links and Articles
Dividends - Website - Articles - The Globe and Mail
Dividend Stocks for Young Investors - Dividend Growth Investor