Why do Stocks Pay Dividends?

in Stocks

How do you earn from stocks? One way to earn from stocks is through dividends paid to shareholders of the company. Another is through appreciation of the stock price of the company you bought.

Dividends can be in the form of cash or stocks. Dividend will be automatically added to your portfolio through your stockbroker when the payment date  for the dividend has reached. When you bought dividend stocks or stocks that pays dividend, you will earn a passive income from the dividends paid.

When a company makes a profit for a certain period, just say in a year, a company usually share the profit to its shareholders by paying dividends. If the company does not pay dividends even if it makes a profit, I think it is not a good company to invest in. This kind of stock is what we call growth stock. Meaning, the company use the profit to invest more on other projects hoping the stock price will appreciate.

Dividend is a form of passive income. The dividend stock will always give you income as long as you hold the stock. So I think it is advisable to concentrate your stock investments to stocks which pay dividends if you’re goal is for long-term investment.

In conclusion, a company pays dividend because it share its profit to stockholders in the form of cash or stocks. So it is also a good strategy in investing in stock to pick those stocks that gives high and increasing dividends through the years.

In a long-term investment in stocks, a high yielding dividend stocks are surely worth the investment you will put in it because it will give you income every time the company will share its earnings to the shareholders.

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{ 7 comments… read them below or add one }

Kimy August 5, 2011 at 08:14

sir…i really wanted this…investment things and strategies on how to play with stock market. on the other hand i am sure as heaven that i don’t even know the basics of investment. importantly, i want to know if 10,000php is enough to buy a stock. i want to know where can i buy a stock and if there is really a need that somebody wants to withdraw with his shares so somebody else could buy his share and have his stock. and how would i know that the seller sells fairly and not overpricing (if these fraud-acts do happen).. please help. thank you much. and what is the difference between stocks and shares.. hay, okay po, magreresearch nalang ako.

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Anonymous August 6, 2011 at 02:42

Hi Kimy,

To answer your questions, before you can buy a stock, you must open first a stock account through a stock broker. In my case, I have a Citiseconline account. The minimum opening deposit of Citiseconline is P25,000.

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Tim | Every Peso Counts August 25, 2010 at 04:13

Thanks Gil. Another thing learned today. I don’t know if I missed it… How would I know if a company pays dividends? Let’s make the PSE as a basis… Any specific area on where to look?

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Gil August 25, 2010 at 22:57

You can go to PSE website, then on the right hand corner input the stock symbol for example AC. Then click go.
A new window will appear, you can see the stock info for AC, also dividends it paid.

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Eleazar | Entrepinoy Bank August 25, 2010 at 01:53

This is the obligation of the company to impart and share their earnings to their stockholders.

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Tim | Every Peso Counts August 24, 2010 at 23:38

Thanks, I was a little confused for sometime because I thought you only had to buy and sell stocks. I didn’t know that stocks generate dividends for some companies. However, if a stock is priced low (say 50% off) with the possibility of going up to a hundred percent again in a few months, wouldn’t you think that it’s still a good buy?

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Gil August 25, 2010 at 03:05

Not all stocks give dividends, only those which are called dividend stocks, those which don’t give dividends maybe called growth stocks.
It is very hard to determine if the stock is undervalued, you need to calculate it real book value by many factors involve.
My strategy now is to invest in stocks which pay high dividends and invest money on regular basis.

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