Dividend Stocks For Beginners: What are Dividend Stocks?

A dividend is your share of a company’s profits. They are typically paid out quarterly. Some companies, such as those in the U.K., make a semiannual payout to shareholders. The best dividend stocks tend to be older, more established companies.

Dividends are a distribution of a portion of a company’s earnings that it doesn’t retain for business purposes. Owning dividend stocks can help you be more successful, build greater wealth, and focus on your long-term wealth building and financial goals instead of short-term stock market movements

A dividend, as described above, happens when a company sends money (or, very rarely, stock) to its shareholders. When a company gets to the point that it consistently earns more than management can effectively reinvest in the business, establishing a dividend policy and sending those excess profits back to investors is a smart move. 

Dividends generally come in two types:

1. Regular dividends: These are dividends that a company generally expects to pay consistently over time as part of its recurring earnings. Most companies try to pay a regular dividend that they know they’ll be able to pay in both good and bad years. Regular dividends are typically paid quarterly (once every three months).
2. Special dividends: These are dividends that you can consider “one-off” payments. A company might pay a special dividend after a string of highly profitable quarters. In some cases, a company will pay a special dividend because it sold off an asset and doesn’t have an immediate use for the money. Some companies also pay special dividends because they have accumulated cash over time that the business does not need to sustain its operations. Companies often announce special dividends to tell the market that they plan to send cash to shareholders, but that shareholders should not expect the dividend to be a recurring event.

Investors look at dividends relative to the price of a company’s shares. Investors divide the total amount a company pays in dividends per year by the price of the stock to arrive at what’s known as a dividend yield. So a stock that pays annual dividends of $0.50 per share and trades for $10 per share would have a dividend yield of 5%.

Dividend yields enable investors to quickly gauge how much they could earn in dividends by investing a certain amount of money in a stock. If a stock has a yield of 5%, you know that you would earn $5 on every $100 invested, $50 on every $1,000 invested, and so on. A dividend yield also allows you to compare a stock to other income investments, such as bank CDs or bonds.