Definition: A dividend stock is an ownership share in a company that regularly distributes a portion of its profits to its shareholder, allowing them to build long-term wealth through a steady stream of income on a systematic basis.
What Does Dividend Stocks Mean?
What is the definition of dividend stocks? Many companies compensate their shareholders with cash payment that are distributed out of the firm’s retained earnings. These payments are called dividends.
For instance, a firm with a payout ratio of 62 percent means that it distributes 62% of its retained earnings to its shareholders as cash dividends and the remaining 38% is directed towards lowering the short-term debt, launching a new product, investing in a new market and so. Firms that have both common and preferred stocks compensate the preferred stockholders first and then the common stockholders. In addition to the annualized dividends, dividend stocks may pay a special one-time dividend following a liquidation of investment or the sale of an asset.
Let’s look at an example.
Example
Jason holds 180 shares of a technology company that currently trade at $67.82. The company pays an annualized dividend of $2.34 per share; thus, Jason collects a check of $105.3 each quarter.
Jason keeps $2,000 in his checking account, and he decides to buy more stocks of the technology company because he realizes that the company pays good dividends over a long period of time. If he had invested $2,000 since 2009 that he holds the stocks, he would have created a steady stream of income through dividend payments.
Jason writes down how much money he has collected from the dividend payments since 2009. From 2009 to 2011, he collected $565.20; from 2012 to 2013, he collected $522.0, and from 2014 to date, he collected 1,114.20.
If Jason had invested $2,000 more, he would have 29.5 additional shares, making up a total of 209.5 shares. These shares would pay him a dividend of $122.56 per quarter. Dividend investors invest in these stocks for the sake of dividend per se and the amount of money they can receive from dividend investing.
Summary Definition
Define Dividend Stock: Dividend stocks are shares that consistently return shareholder value in the form of dividends.
