Profiting from Dividends

Dividends are small payments that are distributed to shareholders on a regular or irregular basis just for owning a share of a corporation. While not all stocks pay a dividend, many give very good dividend yields to their shareholders. Investing in high dividend corporations is regarded as one of the best ways to pile up returns in the long term. Some high yield stocks offer dividends as high as 4-5% of the stock price, which further compounds the capital gains into a decent return.

How Dividends Work

Dividends are usually paid on a quarterly, bi-quarterly or yearly basis as a way to give back to shareholders and disperse profits when need be. Sometimes the dividend will be a special dividend paid once to investors after the sale of a part of a business or after a large windfall. Special dividends are generally much greater than a routine dividend - sometimes as much as 10-15% of the stock's value. Long term investors are generally happy to receive large one time dividends, even if it does affect the bottom line of the particular stock.

Investing 101 teaches that dividends are a great way to get the best returns for the long term investor. High dividend stocks can be used as an income tool, as well for retired and fixed income investors as a way to get 4-5% return in cash each year and grow your investment with the capital gains of rising stock prices. There are even special programs called DRIPs which automatically reinvest your dividend payments into more stock at the current price.

Dividend Reinvestment Plans

DRIPs or Dividend Reinvestment Plans are a favorite with investors because the amount of shares they own grow over time. Buying 100 shares of stock with a 3% dividend yield would mean that an investor would grow their stock holdings by 3% every year. The first year you would have 100 shares, the second you'd have 103, and the third you'd own 106.09 shares. The best part about DRIPs is that they do not charge commission, and you go directly through the major corporation to buy shares.

Huge Disparity between DRIPs and Non-DRIPs

The best returning stock of all time Altria, formerly known as the cigarette giant Phillip Morris, also had some of the highest dividend yields. If you had invested $5000 at the IPO of Phillip Morris and reinvested your dividends through a Dividend Reinvestment Plan, you're holdings would now be worth about $1.5 Million. The same $5000 invested without compounding dividends would only be worth about $400,000. As you can see, dividends help you compound returns while making money with rising stock prices. The difference of reinvesting dividends is worth about $1.1 Million - which is a huge amount of money on a small initial stake of just $5000.

High dividend stocks are extremely rewarding and should always be considered as a part of a diversified portfolio. In times of falling stock market prices, dividends give you a bit of a cushion, and when times are good, they bring additional returns to the table. Many investors like to see companies pay dividends because it gives them the reassurance that the company is healthy and can afford to give a little back to their shareholders.