Why Investors Love Dividends

One of the first things that got us excited about investing was discovering dividends.

Seriously, think about it. You buy an investment and after a short time, it sends you money. Not because you did anything other than simply owning it.

Getting paid to own an investment is what makes dividends so appealing.

So what exactly is a dividend?

A dividend is simply a payment made by an investment to the people that own its stock.

Let’s say a company is making plenty of money and decides it wants to share some of those profits with investors. One way it can do that is by paying a dividend.

If you own shares of that company, you get your piece. It’s like getting a tiny bonus just for being an owner.

How much do dividends pay?

That depends on the investment. Some pay very little. Some pay quite a bit.

You’ll often hear investors talk about something called a “dividend yield”. Don’t let the fancy term scare you.

A dividend yield is how much income an investment pays compared to its price.

Imagine you own one share of a stock that’s currently trading at $100 a share. That investment pays you $4 a year in dividends. That’s a 4% dividend yield.

It’s that simple.

Why dividends are so powerful

Here’s where things get interesting.

You can spend your dividends if you want. Lots of people do. Or you can reinvest them.

That means using the dividend money to buy more shares of the investment. And now those new shares pay dividends too.

Then those dividends can buy even more shares. And before long you’ve got a nice little snowball rolling.

Dividends can help create more dividends, which creates even more dividends!

That’s one reason long-term investors love dividends and reinvesting them.

A quick warning

Not all dividends are created equal.

Sometimes you’ll see an investment with an extremely high dividend yield (like 20%). That can be tempting, but sometimes there’s a reason the yield is so high.

The company could be struggling. Or the company’s financial ability to keep paying that dividend might not be sustainable over the next few years.

A giant dividend isn’t always a good thing, and could be a “dividend trap”.

That doesn’t automatically mean all companies that pay high dividends are bad or are a dividend trap. But as with most things in investing, if it looks too good to be true, it’s worth taking a closer look.

Why it matters

At Firreo, we’re big fans of investments that pay you.

Not because they’re flashy. Actually, they’re usually pretty boring. But boring can be a good thing when it comes to investing.

Over time, dividends can help you build investments that not only grow in value but also give you income along the way.

And that’s something we’re pretty excited about.