What Are Dividends?

Dividend check
Simply put, dividends are when a company you own stock in sends you money from the profits they have made.

That has a nice sound to it, doesn’t it?

So let’s look into this a bit deeper.

Every day, people go to work at that company.  And they are paid wages  to do this for one reason.  That is to help the company make a profit.

Let’s take a small retail company as an example called ABC Retail.  ABC retail sells fashionable men’s and women’s clothes.  For the past three months ABC has sold $3,000,000 worth of clothes.

After paying all of their expenses, like the cost of the clothes from the wholesaler, employees pay checks, the utility bills and taxes; ABC has $500,000 of pure profit left over.

It’s real money just sitting there in the company’s bank account.  And there are no more bills to be paid.

Now there are a number of things that ABC can do with this money.  One of the things they can do is pay it to the owners of the company.  That’s you – since you own stock in the company.  You and the other people who own stock in the company are the owners.

So the profit really is your money.

If there are 10,000 owners of the company and they all own one share of stock, just like you, then they can divide up the profit of $500,000 among the 10,000 shareholders (owners) and send them all a check for $50.

Notice that I said the phrase, “They can divide up the profit.”  That word “divide” sounds very similar to the word “dividend” doesn’t it?  And that is exactly what a dividend is.  It is a profit divided up among the business owners, the shareholders.  The word “dividend” actually comes from the Latin word “dividendum” which means, “thing to be divided.”

Now getting a check for $50 is nice, but what if you wanted to get more?

Well, in the real world, if the company had 10,000 shares of stock outstanding, it would not have 10,000 owners, each owning just one share.  I just did that to make the example easy.

Normally there would be fewer owners and they would own different amounts of shares.  One owner might own a thousand shares; some might own only 10 shares, etc.

So if you owned ten shares of ABC, instead of a check for $50, you would get a check for $500.  Now that’s much more interesting, isn’t it?  $500 gets my attention.  And that’s just for three months of profits.  It’s quite possible that the ABC Company could make $500,000 in profit again in the next three months, and the next three, and the next three.

Which means every three months you would be getting a check for $500 from them. So in a year you would get $2000 in dividends from your ten shares of stock in the ABC Company.

This is one of the ways people pay for their retirement.  Year after year, they buy more and more shares in stocks that pay dividends.  And when it comes time to retire, they are getting enough regular dividend checks from these shares of stock that they can live off of the dividend income.

So dividends can be an important part of your investment success – and financial and retirement future.

To your health and prosperity – John

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