Understanding Stocks

32 UNDERSTANDING STOCKS
Dividends: Another Way to Make Money
You already know that many investors are attracted to income stocks
because they pay dividends. Let’s take a closer look at exactly how dividends
work.
As mentioned before, a corporation that has made a lot of profits
passes some of those profits to shareholders in the form of a payment
called a dividend. It is usually given to shareholders in cash (in fact, by
check), or, if desired, it can be used to buy more shares of the stock.
Dividends are a great idea. Not only do you make money as the
price of your stock goes up, but you can also receive a bonus from the
corporation in the form of a dividend every quarter. Keep in mind that
the corporation’s board of directors is not required to distribute a dividend
but often does so when the corporation is doing well.
If you own a lot of shares of a stock, perhaps 5000 shares or more,
your dividend payments can add up substantially. Let’s say, for example,
that a corporation pays $0.25 per share quarterly dividend on your
5000 shares, which adds up to $1 in dividends each year. That means
that every 3 months you will receive $1250, for a total of $5000 a year.
In addition, if the stock you own goes up in price, then you also make
money on the gain (assuming you sell the stock).
People used to talk a lot about dividends, especially investors who
were nearing retirement age, because so many investors depended on
their dividend checks to live. Some people will buy only stocks that pay
hefty dividends. The corporations that traditionally paid dividends were
the large blue-chip companies that are included in the Dow Jones
Industrial Average (in the game of poker, blue chips are the most valuable).
Corporations of these types tended to attract older investors who
were more interested in the dividends than in the stock price.
Unfortunately, a lot of corporations, even the blue chips, have lowered
or eliminated their dividends. In the go-go 1990s, corporations
wanted to use every cent they had to enlarge or improve their business
and weren’t willing to give some of that money back to their shareholders.
Technology corporations in particular weren’t in the habit of
paying dividends. You can easily find out the amount of the dividend, if
any, that a corporation pays by looking in the newspaper.