What is a Dividend? A Simple Explanation + 4 Tips

Whether you are just starting to invest or have been investing for decades, dividends can be a valuable part of anyone’s investing portfolio. However, you’ll typically see dividends associated with those getting closer to retirement who are not looking for as much growth in their investments but are more so looking to supplement their income.

As with any part of investing, you should first understand what it is you’re investing in. Although Reddit can provide an abundance of personal finance information, we’ll focus on investing in anything that pays out dividends. Below is a guide to help you get started.

Dividends can provide income and growth for long-term investments. In addition, many times, there will be options to reinvest dividends back into the same company automatically.

What is a Dividend?

Let’s use a basic example of how a dividend might work. Company X has a share price of $100, and you own 100 shares. Company X announces they will pay a $1.50 dividend per share on the next payment date (companies announce dividend amounts several weeks before the payment).

Dividend Example

Many companies that payout dividends are well-established and stable companies. By paying a dividend, they attract investors creating more demand for their stock. Often, paying a dividend can be seen as a sign of power and strength within a company, making their stock more attractive to investors.

Why Companies Pay Dividends

Many companies won’t pay dividends for several reasons, the biggest being it hurts their bottom line. That is much less cash the company has and is therefore much less valuable when paying out dividends. Usually, companies just starting up, like a new online business, are more mindful of their cash flow.

Why Companies Don’t Pay Dividends

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