What is a dividend, and is it worth investing in dividend stocks? Let’s walk through the definition of dividend, and compare investing in dividend stocks to investing in growth stocks. A dividend is a payment made by a corporation to its shareholders, usually in cash, and usually as a distribution of profits.

⏱️TIMESTAMPS⏱️
0:00 What is a dividend
0:15 Dividend definition
0:43 Dividend payout ratio
1:39 Investing in dividend stocks
2:27 Dividend stocks vs growth stocks
3:45 Dividend stock company priorities
4:13 Growth stock company priorities

How does investing in #dividend stocks work? Let’s look at investing in the stock market in general. Let’s say that Sara wants to make her first investment in the stock market, and become a shareholder of a company. She is hoping that the investment she makes today of the small bag of money will grow into a larger bag of money. The difference between the current small bag and the expected bigger bag in the future is called the return. There are two ways this could happen: by an increase in the share price (Sara might be able to sell the shares she bought for a higher price than she bought them for) or from dividends paid by the company. Depending on the country that Sara is in, there might be a capital gains tax on the share price increase, and/or a dividend tax on dividends received.

Should Sara invest in #dividendstocks or growth stocks? This is confusing to her. She doesn’t fully understand what the difference is between dividend stocks and growth stocks. She does some research online, and finds the profile of a typical dividend stock (company A): over the past five years, the share price has gone up and down a little, but mostly stayed in the same range. That does not look very exciting to her at first. However, the cash dividend that this company pays on an annualized basis is $2.36 per share. So if Sara had invested in this company five years ago, she would have made an annual dividend yield of around 4.8%. By contrast, a growth stock that she discovers (company B) has had a very significant increase in the share price, but this company is not paying a dividend. If Sara had invested in this company five years ago, the value of her shares would have gone up, but she would have had to sell some of the shares in order to convert that to cash.

Sara does realize that historical returns (either for dividend stocks or for growth stocks) are no guarantees for the future performance, and that by investing in the stock market she does risk losing money if share prices drop.

Want to track the total return on your stock portfolio (share price increase/decrease plus dividends received), then check out the easy-to-use online portfolio tracker called Sharesight: https://www.sharesight.com/thefinancestoryteller/

Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and investing enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better #stockmarket investment decisions. Philip delivers training in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!