How Does
How Does a Dividend Stock Work?
By Faith O
eHow Contributing Writer
Dividend Stocks: An Overview
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A dividend stock is a regular-income-producing investment. The main difference between dividend stocks and regular stocks is that in addition to providing value in the form of increased share price over time, a portion of their earnings also goes to their shareholders as dividends. Many of the good dividend stocks are those of companies that are household names and produce high-quality products that stand the test of time.
Dividend-paying stocks are good and come particularly handy in tough economic times. The dividends earned could possibly offset some of the losses incurred by being in the stock market. The best dividend-paying stocks are often those of companies with great value that have been paying dividends for decades and produce high-quality products and a loyal customer base. One example is Procter and Gamble.
Dividend Yield and Payout Ratios
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The key things about dividend stocks that people look for when deciding to invest is dividend yield and pay out ratio. The dividend payout ratio is the percentage of the company's earnings that is paid out to shareholders as dividends, while the dividend yield is the annual rate of return per share of a dividend stock.
The higher these figures are for a particular stock, the more money gets added to your portfolio from the company's earnings. So if the company makes money, you get some extra money in addition to the price of the stock going up. Here are some examples of high-paying dividend stocks: Altria (NYSE: MO) with a 6.3 percent dividend yield and 76 percent payout rate; Pfizer (NYSE: PFE), 6.7 percent yield, 92 percent payout; Verizon (NYSE: VZ), 5.9 percent yield, 83 percent payout.
Dividend Reinvestment
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Another feature of dividend stocks is dividend reinvestment. This is a provision that allows your dividends from a particular stock to be automatically reinvested into purchasing more shares of the company's stock. Therefore, over time as your earnings grow, you own more of the company.
eHow Article: How Does a Dividend Stock Work?
