What are dividends?

Dividends are a sum of money that certain companies pay to investors. Basically, this money issued to provide shareholders a regular taste of the company's profits. These payouts are generally issued quarterly and are common at large companies that have been around for many decades but less so at smaller, newer companies. (Apple offers dividends; Google does not.)

The amount of the quarterly dividend is not dependent on the stock price, but rather on the number of shares an investor owns, so it’s a reliable source of income (or investment growth) regardless of whether the stock happens to be up or down. Companies pay a consistent dollar amount per share owned, which, depending on the price of the stock, will either be a larger or smaller percentage of the share price. This number, which is called the dividend yield, is simply the amount a company pays per year divided by the share price, so if XYZ Corporation pays a $10.00 annual dividend on a $200.00 stock, the yield would be 5%.

The most important thing to decide about dividends is what you want to do with them when they arrive four times a year. Retirement aged folks may choose to receive them in cash; those hoping to see major growth in their investment will instead enroll in a dividend reinvestment plan, or DRIP, which automatically reinvests the dividend and buys you more shares of stock without you doing a thing. The more shares you have, the more dividends you’ll receive, and because of this it’s hard to quibble with the portfolio-boosting potency of the almighty DRIP.