Although not every companies stock you buy will pay a dividend they are something to consider when buying stocks.  Having a percentage of dividend paying stocks in your investment portfolio has some advantages.

First and foremost what is a dividend?  Simply put it is a portion of profit that a company pays out to its stock holders.  An obvious point here is that a dividend is only paid when a company is making a profit.  That said not all publicly traded corporations that are making money pay out a dividend.  Any profit not paid out to shareholders is called retained earnings.  Additionally the frequency that a company may pay out a dividend can vary from monthly to yearly.  For that reason dividends are generally looked at on an annualized basis. 

Since dividends are a portion of profit the amount paid out varies from year to year and in many cases from quarter to quarter.  Dividends are usually paid in cash to the shareholder miraculously appearing in your online brokerage account.  Some companies who regularly pay dividends will offer what is called a Dividend Reinvestment Plan (DRIP for short).  Many investors believe that a DRIP is a key to a successful portfolio, particularly for the Buy and Hold Investor. 

A Dividend Reinvestment Plan is one where a company allows the stock holder to use the dividend to automatically buy small amounts of their stock.  Usually this is done without having to pay a commission.  As stated this is a great plan for the Long Term Investor.  Using a DRIP allows the investor to accumulate stock without additional expense to the investor thus over time averaging down their overall investment.

For the investor nearing retirement or already retired dividend paying stocks can be an excellent way to generate regular income.  By doing nothing more than taking the dividend as income one can offset a pension or other retirement draws.  A word of caution is to remember what has already been stated, this is profit dependent and can vary greatly from year to year.  The best paying dividend stocks are those of companies that are large, the blue chip type companies.

When considering buying stocks in companies that do not pay dividends take a good look at the financial statements.  Make sure that the company is using their retained earnings to reinvest in the company through new projects or other forms of expansion.  If not you will need to consider whether the company is worth the investment of your hard earned money.

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