Many stocks, mutual funds, and other investments issue dividends (usually quarterly) to investors. The dividend represents a share of the company's or investment's profits in relationship to the number or value of the shares held by the investor.
Think of a dividend as interest on a loan. You shell out money for a share of a company just like a bank issues a cash advance to a borrower. The lender receives interest on the loan, while investors receive dividend checks as a portion of the profits or reserves.
Not All Investments Issue Dividends
When a publicly-held company (one that issues stock) generates a profit, it can either issue dividends to its shareholders or absorb those profits back into the company. The latter option helps the corporation grow economically while the former appeases the investors.
Dividends Don't Always Last Forever
You might purchase stock because the company behind it offers excellent dividends. However, at some point down the line, the company might decide to cease that practice. This usually means the company has experienced financial difficulty, according to Investopedia.
Dividends Often Fuel Retirement Accounts
While dividends exist in all stages and types of investments, they usually come into play in retirement accounts. Retirees frequently become more risk averse, so they don't want to rely on buying and selling stock as it appreciates in value. Instead, they prefer a reliable source of income. Dividends provide that.
Dividends offer just one method of generating income from investments. Sign up for Mint to learn how to manage your investments more efficiently and to keep track of your progress.