What are dividends?

The literal definition is as follows: Dividends are the distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.

Dividends are typically paid out in quarters but there are other options available so make sure you pay attention when selecting a stock. Dividends are one of the most important offerings incentives fore shareholders to invest in a particular stock or company. Dividends are a great indicator as to the health and profitability of a company. A company that is able to share their profits with the shareholders over a long period of time are stable well run businesses. If a company cannot sustain the dividends to their shareholders it is an early indicator of potential financial problems.

The amount offered per share is called Dividend Per Share or DPS for short. The higher the DPS the better. The one caveat is that if the DPS is too high, meaning the company is sharing most of their profits, it could be an indicator of a problem. Be concerned if the offering seems too good… as it probably is.

Dividends tend to even out the market when things are bad and is paid out regardless of current share price. Dividends are a great insurance against the fluctuations in stock price and as such have become one of my rules for determining if I am to purchase a stock or not.