Copyright 2016 Mario V. Farina
Shakespir Edition, License Notes
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In the last chapter you saw that when you own the stock of a company, you own part of the company. From time to time, the company will want to distribute an amount of money to persons who own shares of stock. For example, a company may decide to pay out thirty cents per share to its stockholders. If you owned twenty shares of the company’s stock, you would receive a check for $6.00. This amount of money is called a cash dividend, or, more simply, a dividend.
The money that a company pays out in dividends comes from the profits it has made in the current year or in previous years. It may elect to pay a dividend even in years during which it does not make a profit so long as it has the money saved up with which to do this.
Dividends are distributed by the elected leaders of companies. When a company decides to pay a dividend, it is said that the company declares a dividend. Companies are not obligated to declare dividends. They do this when they feel that it is in their best interest to do so. The amount declared as a dividend is arbitrary. It can be generous or not so generous. The dividend does not necessarily have a direct relationship with the current price of the stock.
Successful companies pay dividends on a regular basis. You may find that the company in which you are interested pays out thirty cents per share four times a year. This dividend is called the company’s regular quarterly dividend. It is said that this company pays a regular dividend. Companies that pay regular dividends are held in high esteem. These are the ones you want to invest in.
From time to time a company may elect to increase the amount of its regular dividend. This is good news for shareholders because it is an indication that the company is doing well. By the same token, it is bad news when a company decreases the amount of its regular dividend. Investors take this to be a warning that the company is experiencing financial difficulties.
As a long-term investor, you should be interested mostly in companies that have paid a regular dividend for a long time and have a history of increasing the amounts of their payouts frequently.