Dividends: The Things that You Should Know
When we say dividends, we refer to the payment from a corporation to its shareholders. Dividends can be in cash, called cash dividends, or in the form of stocks, called stock dividends. And for knowing these all you need to be aware of the different trading platforms and not to forget about the forex exchange.
If you are a shareholder in a company, think of dividends as your share in the income of the business. A big number of stable, established companies offer steady dividends to their shareholders. This is partly due to the fact that the stock prices of these companies do not usually move too much. In a way, the company uses dividend offerings to entice, convince, reward, and retain its investors.
Reasons to Invest In Dividends
Many investors use dividend stocks to accumulate wealth. They take advantage of the steady payment that such stocks can give.
In addition, if you receive dividends, you can reinvest them to purchase more stocks in a company.
Since many companies that provide dividend payments are mature and stable, the ideal setup would be the company’s stock price increases over time while its shareholders enjoy monthly, quarterly, or annual dividend payments.
Further, strong and well-established companies typically raise their dividend payments. So if it seems low for now, you might want to stick around and see if the company can perform better. If it does, you can be sure your dividend payment will raise.
Companies that pay steady and incremental dividends are most likely financially healthy firms that sport good cash flow, where dividends come from. And since their stocks are less volatile compared with others, they are lower-risk investments than stocks that are more volatile.
DRIP – Dividend Reinvestment Plans
Reinvesting your dividends is something you should do if you want to take full advantage of the good things they offer. Among the recommended ways of doing that is the DRIP, or dividend reinvestment plan.
A DRIP is a plan that a company offers. It enables investors to automatically reinvest their cash dividends via the purchase of additional or fractional shares on the dividend payment date. Instead of receiving the dividends quarterly, the entity responsible for the management of DRIP puts the money directly to purchase additional shares. That entity can be the company itself, a transfer agent, or a brokerage firm.
Many DRIPS allow you to buy extra shares with no commission. If you’re lucky, you might even stumble upon those that give discounts to the current share price. DRIPs operated by the company itself are commission-free. This is because no broker is involved.
Other DRIPs offer to let shareholders buy additional shares in cash at a discount that can range anywhere from 1 percent to 10 percent.
Because of such reasons, the cost basis of shares acquired this way can be substantially lower than if you bought it outside of the dividend reinvestment plan.
Looking at it from a company’s perspective, DRIPs can be appealing because it can sell shares directly to its shareholders without going through an exchange. That’s because the money from the stock sales can be reinvested directly into the company. DRIPs can also allow companies to raise new equity capital as time goes by while diminishing the cash outflow.