What is a Dividend?

A dividend is money paid directly to an investor in a company's stock. Some publicly owned companies offer one with their stock, while others do not. The choice of buying and owning a stock that pays a dividend is up to the individual investor, as there are both positive and negative aspects to consider. A company that offers one with its stock is often a larger, more stable business in a field with little growth or a slow, steady growth potential.

When a company offers a dividend to its stock holders, it is taking money that could be reinvested into the company, and distributing it to shareholders as a benefit of investing in the company. Receiving one is good for investors, because they get a guaranteed return on their investment in the form of the money. A stock that returns a dividend is good as an income investment or a long term growth investment. This is because these stocks tend to remain stable, and offer a tangible monetary benefit to investors.

Some investors shy away from stocks that offer a dividend for this very reason. A company that gives one to its investors is not using that money to expand the business. Therefore, the stock may be less likely to grow in value, or may grow at a slower rate in comparison to a company that does not offer one, but instead uses its profits to expand or seek out new business opportunities. Investors seeking shorter term investments or rapid growth tend to look for stocks that do not offer a dividend.

The dividend a company offers to its shareholders is usually paid out each quarter. The amount is set at a certain dollar value for each share of stock owned. If you own 100 shares of a stock which pays $1 US Dollar (USD) per share each year in dividend, you will receive $25 USD every three months. These quarterly payments make the annual amount $100 USD. Most companies that pay a dividend also have a reinvestment program.

With a dividend reinvestment program, instead of taking them as payment, the investor can choose to reinvest each dividend and take the value in stock instead of cash. In this case, the investor's stock value would increase by $25 USD the first quarter. Because the value of the stock is now higher than before, the dividend for the next quarter would actually be higher than $25 USD, based on the number of additional shares that the first amount was able to purchase. By reinvesting, an investor can easily increase his or her stock holdings.

With any investment, research, planning, an eye for the market, and a little bit of luck go a long way. Depending on your investment needs, a stock that offers a dividend can be a profitable long-term investment.