What is a Dividend?
A dividend is a cash payment made by a company to its shareholders from its profits. If a company declares a $1.00 quarterly dividend and you own 100 shares, you receive $100 every quarter. Dividends have historically contributed about 40% of the S&P 500's total return over the long term.
Dividend Growth Investing
Companies that consistently increase dividends year after year - known as Dividend Aristocrats - have raised dividends for at least 25 consecutive years. These companies tend to be financially stable with strong cash flows. Reinvesting dividends through a DRIP (Dividend Reinvestment Plan) accelerates compounding by automatically purchasing additional shares.
Key Considerations
Dividends are not guaranteed and can be cut during economic downturns. A very high dividend yield (above 6-8%) may signal financial distress rather than generosity. Focus on dividend sustainability - look at the payout ratio (dividends as a percentage of earnings) to ensure the company can maintain its payments. A payout ratio below 60% is generally considered sustainable.