It’s one of those words that I’m pretty sure the average punter doesn’t use in their everyday life, but I thought it worthwhile to explain what exactly a dividend is and how they work.
Essentially when you own shares, there are two ways you can hope to make money. Income and capital growth.
Capital Growth and Income
Capital growth means you hope that the price you pay for the shares will increase over time so that one day you can sell the shares for more than you paid for them.
This is the thing that most people focus on with shares, looking at stocks and trying to find something that is either undervalued and will eventually have a correction, or that due to economic or market opportunity, the share will go up in value.
What many of us forget about, or maybe don’t even fully understand, is that share pay us income while we own them too. This is called a dividend.
Owning a share is actually owning a small piece of a company, and each year companies aim to make profits, this profit is then paid out to shareholders in the form of dividends.
Profit distributions from the company. It’s quite simple, and shouldn’t be overlooked when assessing whether or not a share would be a good investment or not.
Many shares are priced fairly and may be quite stable, not increasing a lot in value, but if they’re a highly profitable company, large dividends could well make up for the lack of capital growth. The opposite can also be true.
Hopefully that’s given you a little extra knowledge on how shares work, but be sure to do your research or seek advice if and when you are ready to start investing in shares.