Understanding Wealth IV

As I mentioned in my last post I will be talking about generating an income from Stock Dividends. Stock Dividends have some clear advantages and disadvantages that separate them from Money Market accounts. The biggest disadvantage that comes to mind is the greater potential to loose initial capital. Although companies that give the type of dividends that you would want to rely on for income are usually larger companies with very stable track records of doing business. Although that isn't necessarily a guarantee of any kind. Many of the wealthiest people in this world rely on dividends from stock investments as a source of income.

What is a dividend? Dividends are money given back to shareholders by the company. This money usually comes from profits the company has earned. Since shareholders own a small stake in the company, it's the companies way of passing profits on to the shareholders. Not all companies pay dividends, it's totally up to the management of the company. Some corporations simply keep the dividends to reinvest in their companies to help fund an increase in company growth.

When looking for a company to invest in for dividend income there are some things that you should look for. You want to look for a company with a history of paying consistent dividends. Dividends are usually paid quarterly so you want to make sure that they have been paying a consistent dividend for at least 5 years or more. You also want to make sure that the amount of the dividend is also consistent. Dividends naturally will vary some depending on company profits it's always a good sign if you see a slow steady growth in the amount of the dividend. Often times that shows the companies are having growing profits, and is a stable company. That's the type of company you want to invest in for income.

One of the very best things about investing in stocks that provide dividend income is the potential for capital growth. Stock prices go up and down so it's possible to lose your capital investment however, most companies that provide stable dividend are usually stable companies and more than likely their stock price will actually increase over time. Stock dividends usually are 4% to 6% of the stock price. That means if you buy a stock today at $10 per share and it has a dividend of $.50 per share. Over the next 5 years that stock price goes up to $20 per share and the dividend remains at 5% that means the stock that you originally paid $10 for is now paying you 10% on your money. So basically when investing in stocks with dividends your income stream can actually grow without the dividend itself increasing.