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What are Dividends?

When it comes to investing, everyone will have different goals. Some people want to keep their money safe, others want consistent growth. There is no right way to build a portfolio of investments, a good portfolio will suit your needs and help you meet your goals. As such, each portfolio will contain a different combination of assets. In this article, I’ll be discussing dividends and dividend stocks, a specific category of equities that are beneficial for generating income.

A dividend, in the stock market, is a small payment, usually a set percentage of the overall stock price, that the company will pay you for owning the stock. It's like a “thank you for trusting us” payment. Dividends are usually paid out quarterly, meaning four times a year, and they're paid out of a company’s profits, so if a company had an extremely profitable quarter, their dividends may be better. However, the opposite also applies.

A ton of different stocks offer dividends, each offering a different percentage of the share price. Big names like Apple (0.69%, nice), Microsoft (0.91%), and Visa (0.56%) are just a few examples of dividend-paying stocks. However, certain companies pay significant dividends. For example, AT&T pays 6.49%, IBM pays 4.52%, and Universal Group pays 5.34%.

So, if you owned a $1000 in Apple stock, you would get paid $6.9 every quarter, or $27.6 every year. If you owned a $1000 of AT&T stock, you would get $260 every year ($65 every quarter). While Apple does pay dividends, it doesn’t pay an absurd amount compared to other companies. AT&T, on the other hand, does pay a lot more, making it a dividend stock.

If your portfolio is big enough, you can even live entirely off dividends. Say you own $100,000 of AT&T stock, in one year, you would get paid almost $26,000 every year. This is a significant amount of cash.

This leads to the benefit of owning dividend stocks. Dividends are paid out every quarter. While the amount may change slightly from quarter to quarter based on how much money the company made, you will still get paid regardless of how much the stock price goes up or down.

So, let's say the stock market is having a bad year, and most stocks are trending downwards, in the red. If you own just a few shares of a couple different dividend stocks, you’ll get a decent amount of cash, even though the overall market is taking a beating.

Dividends being paid in cash can also be beneficial to you. It's your choice whether you want to reinvest that cash, and buy more stock, or if you want to withdraw it, and spend it. If you choose to do the latter, dividends can provide a nice chunk of additional income every year. If you do the former, your portfolio will grow without you having to deposit more money, even in times when the market is trending downwards.

While dividend stocks are a great kind of stock to own, there are some historical shortcomings. Some dividend stocks don't perform as well as the overall market, or as other stocks, because they pay such large dividends. Essentially, the dividends they pay make up for the lost growth.

This is why it is important to conduct your own research before making any investment and look at each company individually.

Despite this, dividends can be an extremely powerful benefit of investing, and provide you with consistent income/cash.

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