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Definition of Dividend: A Passive Income

Definition of Dividend A Passive Income
Definition of Dividend A Passive Income

We’ve all heard about trading shares on the stock market. Investors often buy and sell stocks in an effort to turn a profit fairly quickly. They buy when prices are lower than normal, then sell when they rise. But this is only one of the ways to make money with stocks.

If you hold on to a stock rather than selling it, you have a chance to receive dividends. A dividend is a portion of the company’s profits that is distributed to shareholders. Shareholders may receive dividends even when a stock’s value goes down. As long as a corporation is financially healthy, shareholders can expect to receive dividends at regular intervals.

When a publicly owned company receives profits, it has two options. It can reinvest the money made, or it can distribute it to shareholders as dividends. Some companies reinvest all profits, and some distribute them all as dividends. But most companies do a combination of both. This way they retain the capacity for growth while offering shareholders the incentives they expect.

Most companies pay dividends at regular intervals, usually four times a year. Many strive to keep the dividends at a set amount, reinvesting what is left. As the company grows, the dividend amounts usually grow as well.

When a company experiences higher than normal profits, it may issue what is called a special dividend. This is presented in addition to normal dividends. A special dividend may be distributed at any time.

The most common method of paying dividends is in cash. But companies may elect to pay dividends in other ways. Some offer additional shares to existing shareholders as dividends. The shares may be newly created, or they may be shares obtained from the market. Some companies offer an option for shareholders to reinvest their dividends, resulting in greater stock holdings.

By purchasing stocks with a good track record, investors can virtually guarantee returns. Shares in a company that pays consistent dividends can perform better than many other investments, including standard savings accounts and certificates of deposit. This method of making money from stocks is very hands-off. Instead of constantly buying and selling, you just buy the stock and collect the dividends.

In spite of the tendency for companies to pay consistent dividends, buying shares is not without risk. There’s always the option for companies to reduce dividends, or even eliminate them altogether. It doesn’t happen often, but when the economy is not doing well, it is a distinct possibility.

Investing in stocks that pay dividends can be a good long-term strategy. But it’s still important to monitor how your stocks are doing. If dividends experience a downward trend, it may be time to consider a different investment.


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