Video Lesson - Introduction to Dividend Stocks: The Stocks That Outperform All Other Stocks

Types of Dividend: There are three common types of dividend that you may hear of; cash, stock and extraordinary.

• A cash dividend is what is explained above, a regular payment of your share of a company’s profits, paid in cash. Unless otherwise specified, we will deal here with cash dividends.
• A stock dividend is when, rather than pay cash, the board decides to reward investors by granting them whole or partial shares in the company for each share held.
• An extraordinary dividend is when a board decides to distribute cash previously held back to shareholders.

Risks of Dividend Paying Stock: As dividends are often seen as an alternative to interest paying securities, such as bonds or CDs, the underlying price of the stock is sensitive to changes in interest rates. In a rising rate environment, stocks with good dividends can lose value dramatically. When a company starts to pay a dividend it can mean that the board can see no other use for the cash. This means that growth through acquisition or expansion is less likely.

1. Dividend stocks are stocks that share a portion of their earnings with shareholders.

2. Because dividend stocks share earnings with investors, they essentially offer investors two ways to profit:

• by earning dividends and
  
• by share price appreciation.

3. Dividends constitute an income stream of sorts, as companies typically pay dividends on a fixed frequency (i.e. monthly, quarterly, annually, etc).

4. As with any income type of investment, time and compounding are key: being patient and re-investing dividends are what truly enable greater returns over time. Historically speaking, data suggests that for large cap stocks the re-investment of dividends has proven to be a greater source of wealth than capital appreciation of the underlying stock.