Dividend Due Diligence

Many beginning investors do not understand what a dividend is, as it relates to an investment, particularly an individual stock or mutual fund. A dividend is simply a payment to shareholders, typically of a publicly traded company. A dividend payment is a payout of portion of a company's profit to eligible stockholders.

Dividends are really a discretionary distribution which a company's board of directors gives its current shareholders. It is typically a cash payout to investors at least once a year, but sometimes quarterly. Stocks and mutual funds that distribute dividends are likely on sound financial ground, but not always. Investors, however, should be aware of extremely high yields, since there is an inverse relationship between stock price and dividend yield and the distribution might not be sustainable. Also, stocks that pay dividends typically provide stability to a portfolio, but do not usually outperform high quality growth stocks.

Source: Investopedia

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