Understanding dividend stocks

Understanding dividend stocks

Like in most things we handle every day, there are many varieties in investments too, both investment types and investment styles. Some of these are exchange traded funds, mutual funds, stocks and bonds, real estate, and much more.

What are stocks? Stocks are an equity investment, that is, money invested in a company in the form of shares. It means that the person having the stock of a company has legal ownership in it. Business houses issue either one of the two types of stock – common stocks or preferred stocks. While common stock gives shareholders voting rights to elect the Board of Directors, they, in turn, decide whether to retain profits and losses or share some part or the entire amount with the stockholders. Profits are given in the form of a cash dividend but remember, there is no assurance of receiving dividend payments. Preferred stock holders, however, receive specific amounts of dividends at certain fixed times. And, this is normally paid first, before the common stockholders are given the dividends. And in the event of a bankruptcy, preferred stockholders have more chances of reclaiming the money they invested in the company.

What is a dividend? A dividend is a sum of money paid regularly by a company to its shareholders out of its profits. A stock dividend, however, is a dividend payment made in the form of additional shares of the company instead of a cash payment. And a stock dividend may be distributed to its shareholders if it has inadequate capital. Dividend stocks of a healthy company, that is a financially strong one, can provide consistent income to shareholders. They, in turn, can reinvest this money in purchasing more shares of the company. Hence, for both people who are just beginning to increase their income and save money for their future, and for seniors who depend on a consistent source of income post-retirement, dividend stocks are a safe choice.

Having said all that, be warned that investing in stocks can be tricky. Understanding the basics of dividend stocks can help you to know about all the financial terms involved and also the market behavior.

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