When you buy dividend stocks, you periodically receive a payment, or dividend, from a portion of the company’s profits. Companies usually pay dividends twice a year. You must buy the stock before a certain cutoff date, called the "ex-dividend date," to receive a given dividend period's payment. If you buy the stock after the ex-dividend date, the seller of the stock receives the dividends for that period. Dividend stocks can still rise and fall like other stocks, and all dividend stocks don't always bring dividends, but stock dividends can provide certain advantages over stocks that pay no dividends.
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If the company doesn’t make a profit, you might not receive dividends, but owning a stock dividend brings you the potential advantage of profiting even if the stock price goes down. For example, if the price of the stock drops 3 percent and the company pays you a 3-percent dividend you haven’t lost anything. You also stand to make more if the stock price goes up. The value of the stock could rise 3 percent and you receive the 3 percent dividend for a 6-percent profit.
Stock dividends usually provide you with gains throughout the year that you can use. Investors with stocks that don’t have dividends might watch a stock go up in stock price, but can’t make money on it until they sell the stock. When you have a dividend stock, and the stock price is rising, you receive the additional profits from the dividends while watching your stock price rise and still owning shares. You have a real return on your investment instead of just a value you see on paper or online stock report.
Dividends you receive allow you to invest more money in the same stock or another investment. When you buy a dividend stock, you are given the choice of taking the dividend payment money or reinvesting it. If you reinvest the dividends into the stock, you buy more shares and add more value to your investment for compound interest advantages. Compound interest includes the interest on the principal amount you have in the investment and the accrued interest, so your money in the stock account continues to increase.
Dividends can outpace inflation, which causes price increases for consumers. Even though you make more money in a year, you pay more for products than you did the previous year and get less if inflation rises. Dividend yields are based on dividing the total yearly dividends by the stock price. A $2 dividend with a stock price of $50 means the stock has a 4 percent yield. If inflation is at 3 percent, you still make gains and beat inflation.
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