Simply put in financial terms, a dividend is a payment to a shareholder/stock owner from the profits of it’s business.
The most common ways dividends are issued are either in the form of a check or deposit to the owner or it can be re-invested into purchasing more shares. Example: Boeing issues dividends on a quarterly (3-month) basis and currently pays $.42 a share. If you owned 100 shares, you would receive a dividend check of $42.00.
Boeing stocks were selling at around $80.00 a piece one year ago. If you had owned 1,000 shares and re-invested the dividend you would have been able to buy another 5 shares (your dividend check was $420.00, just a bit more than you would need to buy 5 shares at $80.00, or a total of $400.00). So you would now own 1,005 shares. So your next dividend check would be for $422.10. That’s kind of cool.
Here is what is cool right now: The stock market is stinking up the place right now, but if you can afford to keep the money where it is and let dividends re-invest themselves you are getting a tremendous increase in returns. Continuing with our example, my 1,005 shares are now giving me a $422.10 dividend payment. Boeing stock (BA) is currently selling for $42.46 share as of 1/16/09. You could re-invest and buy 10 shares today compared to 5 shares one year ago and end up owning 1,015 shares this quarter. The next dividend check would be $426.30.
I fully expect stocks to come back in the next 8-12 months, maybe not to what they were 2 years ago but they will come back. What would you be losing right now if you left your investments alone?
Answer: You would be losing greatly increased returns in the next few years.