A dividend is payment made by a corporation to its shareholders in the form of cash (called cash dividends) or stock (stock dividends). If you’re a shareholder, you can think of a dividend as your share of the company’s profits. Most stable companies offer dividends to shareholders. One reason for this is the stock prices for these financially secure companies typically don’t move much, so dividends are offered to entice, reward and retain investors.
Many investors use dividend-paying stocks as part of a long-term wealth building strategy. Often, this involves reinvesting the dividends to take advantage of the power of compounding and eventually using the then-larger dividend payments as a source of income during retirement. In this guide, we’ll introduce terms to know and other basics – from how dividends work, to researching, reinvestment and taxes.